Ah, the tenbagger. That mythical creature from stock trading lore that grows 10 times in price. This is what dreams are made of. I like a quote from Jason Kelly’s book, The Neatest Little Guide to Stock Market Investing. “It takes only $10,000 and two tenbaggers to become a millionaire.” It’s simple in concept really. Find a fast growing company, hold on to it for 5 or 6 years, and sell it for a long-term windfall. The equivalent of 50-60% annually. It’s every investor-boy’s fantasy but mysteriously elusive. In fact there may only be a few stocks a year that turn out to be tenbaggers. So the question is how do you find them? Maybe I can help, but first a quiz…
Question: What is the name of a stock that grows the equivalent of two tenbaggers?
Answer: A hundredbagger.
Question: Is it possible to find such as stock?
Answer: Yes! Since Monday 7/8/2003, exactly 3 years ago today when Hansen Natural (HANS) began its meteoric rise, the stock has appreciated 9,457% in price. In other words, $10,000 invested 3 years ago would be worth $946,000 today.
Finding these top performing stocks before they leap is possible and has been responsible for the achievements of great investors like Jim Cramer, Peter Lynch and Warren Buffett. So where do we begin? I don’t believe there’s a science to it — as with stock investing it seems more art than science, but I’d like to share this story with you of my recent experience to serve as an illustration of how these tenbaggers may reveal themselves.
I use stock screeners in my research to help me find companies that meet certain criteria. It’s useful for me to be able to learn about a statistic and then find companies that meet target values. For example, I may search for companies with 5-year earnings growth exceeding 10% and Market Caps less than $100 million.
One of the screeners I use frequently is based on Phil Town’s book, Rule #1 (review). I find the results of this screener are a great list of sound companies at various stages of their growth. However, I’ve also read William O’Neils book, How To Make Money In Stocks, which provides alternative criteria for stock selection. So I thought it might be interesting to merge the two screens together to see what comes up.
What I found, to my surprise, was a list of all-star companies that have been making headlines because of their excellent price performance. Some of the names on the list include Hansen Natural (HANS), Cognizant (CTSH), and Eagle Materials (EXP). But alas, there were no riches in these results because these famed companies had already achieved tenbagger++ status. So I thought, “How can I find them before they jump?”
After analyzing the stocks a bit, I realized that the best performers had a period of relatively flat price performance followed by 3 or 4 years of rapid, steady appreciation. In fact their prices doubled once at least once every year during their ascent. If I could come up with a screener that could find companies with relatively flat prices that just recently started growing every year, then I may be able to spot these excellent companies while they still had plenty of room to grow.
I put together a screen that searches for companies with valuations between $50 million and $1 billion who have doubled in the last year but have grown less than 10x in the last 5 years. With these criteria, I’m hoping to find strong growers that haven’t peaked yet. I prefer to use Microsoft’s Deluxe Stock Screener because it can search on the last 5 years of earnings data and you can also perform simple algebra on the various search fields; something unusual for free screeners. Here’s what my screen looked like:
- Market Capitalization < = 1,000,000,000
- Market Capitalization >= 50,000,000
- Industry Name (Display Only)
- Last Price/5-year Low Price < = 10
- Last Price/52-week Low >= 2
It returned 147 results. I then sorted by industry and looked for companies I knew and industries I think have big potential. Honestly, most of the companies didn’t have nice charts like Hansen or Cognizant, and many of the industries like home building would probably grow quickly in the near future.
Finally I found one promising company, Advanced Environmental Recycling Technologies, Inc. (NASDAQ:AERT) which is in the composite lumber industry. My dad is a builder and complains about the cost of real wood lumber, and composite wood is now being used extensively to build decks and exterior trim. Although traditionally more expensive than wood, it offers homeowners lower maintenance and with lumber prices rising, the price differences have been narrowing.
One of the best pieces of advice I ever read was to “buy what you know.” If you know something about an industry because you use their products or services, you already have an edge on other investors.
When finding a stock you have to do research especially when you’re making speculative plays with small-cap companies. These companies are inherently volatile so you have to know the company inside and out before you make a move. AERT’s chart looked pretty good, demonstrating that same flat price movement followed by annual doublings of the other stellar stocks, and I really liked the company’s fundamentals.
Here’s a company steadily growing revenues over 30% a year, but has a low multiple of 13. There are no analysts covering it so it’s not even on the radar yet for the big guys yet, but once the company valuates at over $100 million more people have to start taking notice eventually, right?
I then called my Dad, a builder and real estate investor, to get his take. He gave me names of competitors whom I researched and I also listened to AERT’s most recent conference call on Yahoo. It looked like this company was one of, if not the best, run businesses in the industry and also has an exclusive deal with Lowe’s to sell its ChoiceDek products. What a deal!
I also have heard that when real estate prices soften, people tend to spend more on their homes, and since my father told me contractors are using composite lumber extensively for decks and exterior trim, two of AERT’s biggest products, it looks like sales may even get a shot in the arm.
Everything I saw convinced me that there was a good chance this stock was a real power-play. I decided to take the plunge and buy the stock. Now time will tell if I’m right.
Wrapping it up
Finding tenbaggers is not easy. It takes an insight into an industry or company that few else have, and an eye that spots it before most others do. With smarter thinking and an open mind, you can do it. Is AERT a tenbagger? I won’t know until it becomes one, but I certainly hope so. If nothing else, though I did find a growing company, with good fundamentals, that I’m sure will make me money, and that’s all I care about.