The Seven Characteristics of 10X Stocks

Extreme moneymaking involves investing in a particular type of stock – the sort that has the potential to rise 10X (tenfold) or more, known as “10-baggers.”

My research team and I have pored over the 10-baggers of the last few decades to learn everything we could about them.

You might imagine that a stock rising tenfold is a rarity. In truth, though, it’s far more common than most investors realize.

You might also be surprised to learn that many of the best-performing stocks are companies you’ve been patronizing for years.

Ever use Mastercard (NYSE: MA), for example? The stock is up more than thirteenfold since the last recession.

Monster Beverage (Nasdaq: MNST), meanwhile, is up tenfold. So is Apple (Nasdaq: AAPL). Amazon (Nasdaq: AMZN) is up twelvefold, and Netflix (Nasdaq: NFLX) is up more than thirtyfold.

With that said, these companies can’t continue to grow at these rates in the near future. They’re too big for that now.

However, there are plenty of other companies on the verge of doing the same exact thing.

Some of these businesses are unknown to most investors. Yet they’re delivering blockbuster returns… and are just waiting to be discovered.

Seven Characteristics of 10X Stocks

Peter Lynch, manager of the Fidelity Magellan Fund from 1977 to 1990, is the greatest mutual fund manager of all time.

During his tenure, the fund’s assets grew from $18 million to more than $19 billion. This was partly because he earned a 29.2% compound annual return, a record that remains unmatched in the mutual fund industry. In addition, shareholders rewarded this performance by plowing additional money into the fund.

What was Lynch’s great secret? He was a master at identifying successful growth stocks or, more particularly, hypergrowth stocks.

It was in his book One Up on Wall Street – which is still an investment classic – that Lynch coined the term 10-bagger. And he invested in many such stocks during his time at Magellan.

And here’s the important thing. Although these were different companies in different industries run by entirely different people, most had several characteristics in common both before and during their dramatic runs higher.

We’ve isolated these characteristics and turned them into seven investment criteria – a checklist, if you will – to guide us toward microcaps prone to increase 10X.

Here are the characteristics we found that these stocks typically have in common:

1. They are tremendous innovators. Companies that rise tenfold or more offer revolutionary technologies, new medical devices, blockbuster drugs and other state-of-the-art products and services. Over the last 10 years, for instance, investors have been stunned by the moves made by Tesla (Nasdaq: TSLA) with its electric cars, Apple with its cutting-edge electronics, and Amazon with its breakthrough e-commerce platform and one-click ordering system.
2. They experience terrific sales growth. Notice I said “sales growth,” not profit growth. A lot of the best-performing companies weren’t profitable in the early stages of their run-ups. But even if they were losing money, they usually experienced top-line growth of 30% or more.
3. They protect their margins. Huge sales numbers attract competition the way honey attracts bears. That means a firm has to be able to protect its innovation with patents, brand names and trademarks. Otherwise, competitors will flock to the industry, grab market share and force down margins.
4. They beat consensus estimates. Some investors think earnings alone propel stocks higher. This is largely true over the very long term. But in the nearer term, it’s all about beating expectations. Even if a company loses money, if the loss is smaller than expected, it can register as a significant beat. That means its shares are likely to push northward.
5. They are small cap to midcap companies. It shouldn’t surprise you to learn that most of the best-performing stocks of the last few decades started out as small companies. A study by Chicago research firm Ibbotson Associates reveals that every dollar invested in a basket of large cap stocks from 1926 to 2016 – with dividends reinvested – would have grown to more than $5,200. That’s nice and all. But every dollar invested in a basket of small caps would have grown to more than $25,100 over the same period. Huge companies simply can’t grow at the breakneck pace that smaller companies do.
6. They’re relatively unknown. The fewer people who understand what a company is doing – and the less media attention and Wall Street coverage it gets – the better the chance that shares are mispriced. Hot stocks with splashy stories haven’t been the best performers historically. By the time a company becomes widely known, much of its parabolic move upward may well be over.
7. They have significant insider ownership. Sure, officers and directors have access to all sorts of material, nonpublic information. That gives them insights into their company’s near-term prospects. But if they don’t own the stock themselves, don’t believe them. You should insist on managers who “eat their own cooking.” History shows that when top management owns shares, other shareholders are treated well too.

Higher Returns With Less Risk

Tiny small cap value stocks have significantly outperformed “safe” blue chip large cap stocks.

When you can buy stocks with sales rocketing higher and ultra-cheap valuations, there is no better recipe for success in the stock market.

No matter what investment level you find yourself at today… the key is to take control of your finances and secure your financial future.