The dream of every investor is to purchase the next Apple or Johnson & Johnson as a small-cap stock and watch it bloom into one of the leading companies within its industry. But companies that have the ability and opportunity to grow their valuations from the millions into megacap territory are quite rare.
Furthermore, even when investors find one of these profit powerhouses, they often have a hard time sitting still for the long period of time required to let their investment thesis fully pan out. Information is now constantly at our fingertips, and with the rise of the internet and trading algorithms, holding time frames have seemingly been on the decline for years.
However, there are a select few companies that have turned modest nest eggs into veritable treasure chests over the past 30 years or so. Had you invested $10,000 in any of the following three companies in May 1986, you'd have at least $3.68 million today. Best of all, one of them is a company I can almost guarantee you've never heard of before.
- 36,784% return, equating to $3.68 million from a $10,000 investment.
If I asked for a show of hands to see how many investors had heard of Balchem (NASDAQ:BCPC) before, chances are, not too many hands would be raised. Balchem, which is still just a midcap company today even after its 36,784% romp higher, provides animal nutrition products, food flavorings, and specialty ingredients to the industrial and pharmaceutical industry.
What has allowed Balchem to thrive isn't so much its business diversity as its innovation (and a little bit of luck). As the story was told by The Wall Street Journal last year, Balchem was nearing a point of reckoning in the mid-to-late 1990s, when it was losing money hand-over-fist on a new nutrient coating. Thankfully, management and Balchem workers were able to double production without raising costs, and found ancillary revenue channels for existing products.
An example the article gave was choline salts, which are traditionally developed for food supplement purposes. A staff engineer at Balchem realized that choline salts could also stabilize clay deposits. That eventually opened a new revenue channel for the company, as fracking for oil and gas requires the stabilization of clay deposits. Interestingly, though, fracking didn't become a major technology in the energy sector until years after the engineer's discovery. These innovative pursuits have expanded Balchem's product portfolio organically, allowing it to wildly outpace the S&P 500.
Today, Balchem looks to be fairly valued, if not a bit pricey; but I guess that's to be expected after a nearly 37,000% run! Valued at 31 times next year's estimated profit per share, Balchem would have to produce a major surge in animal and human nutrition and health sales to reasonably support a higher valuation.
- 50,843% return, equating to $5.09 million from a $10,000 investment.
Innovation was also the driving force for Monster Beverage (NASDAQ:MNST), which has delivered nearly 51,000% gains since May 1986. Monster's claim to fame are its energy drinks, which have only grown in popularity over the years with young adults.
Over the past 12 months, Monster has generated nearly $3 billion in revenue, practically all of which was tied to its namesake brand of energy drinks. By comparison, in 2006, it generated only $606 million in full-year sales. This isn't to say the company hasn't had its hiccups. In 2012, Monster was the subject of a Food and Drug Administration investigation into the deaths of five people who'd consumed its energy drinks, which quelled sales for a short period. However, as you can clearly see based on its latest sales numbers, those health safety issues have been put in the rear view mirror.
In recent years, Monster's biggest catalyst has been a partnership with Coca-Cola (NYSE:KO). Under the agreement, Coca-Cola agreed to contribute its energy drink portfolio to Monster, and Monster in turn sent its non-energy product portfolio to Coca-Cola. The deal also allowed Coca-Cola to take a 16.7% equity investment in Monster Beverage, giving it access to the fast-growing energy drink market. Finally, distribution agreements between the two companies were amended, and since 2014 Monster's gross margin has leaped from 54.4% to 62.8% on a trailing 12-month basis. The result was a better-than-doubling of its net income over the past three years for Monster.
Monster Beverage isn't cheap after its run higher -- its shares now sell for 30 times forward earnings -- but unlike Balchem, it has the potential for double-digit percentage sales and profit growth for years to come. Though I'd expect the gains to be substantially more modest, Monster remains an intriguing investment opportunity.
- 64,633% return, equating to $6.47 million from a $10,000 investment.
Last, but not least, we have the operating system kingpin, Microsoft (NASDAQ:MSFT), which has generated a better than 64,600% return over the past 30 years and change.
It's certainly not hard to understand why Microsoft has been so dominant. Despite numerous efforts during the emergence of desktop and laptop computers to unseat it as the dominant operating system provider, Microsoft dug in and ceded very little, if any, market share. Today, Microsoft's Windows OS is so dominant in the PC market, it's almost frightening.
According to NetMarketShare.com, as of January 2017, Windows 7 and Windows 10 combined accounted for 72.5% of all desktop operating systems. Group the less-popular XP, 8.1, 8, Vista, and NT together, and they kick in nearly another 19%. That gives Microsoft a desktop OS market share of about 91.5%, and as you might have surmised -- correctly -- a lot of pricing power comes with a veritable monopoly on desktop operating systems.
But Microsoft hasn't been without its faults. Its Achilles' heel, perhaps, has been its acquisitions; its big purchases have included some notable duds throughout the years. For example, Microsoft's acquisition of Nokia's handset business and aQuantive were both disasters. Its $8.5 billion acquisition of Skype has netted the network a lot of customer usage, but very little in the way of financial benefits.
Nonetheless, Microsoft remains a dominant force in PC operating systems, is regularly generating $23 billion to $26 billion in annual free cash flow thanks to its substantial operating margin, and recently acquired LinkedIn, which will hopefully open new channels of revenue for the company. With annual EPS growth throughout the remainder of the decade forecast to be roughly 10%, Microsoft may still offer modest upside to patient investors.