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.

The Seed
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?”

The Screen
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.

The Research
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.

Hi Chris

Great post! Can I ask what screens you used for the first two – Phil Town and William O’Niels based screeners?

Let us know how it goes – could be promising.

Kind regards,

Phil
Perth, Australia

Here’s my combined screen… it’s a biggie:

ROI: 5-Year AVG >= 10
Annual EPS Growth Rate >= 25
5-Year Revenue Growth >= 10
Return on Invested Capital (Display Only)
Debt to Equity Ratio < = 2 Industry Name (Display Only) EPS Growth Next 5 Yr >= 10
Rating (Display Only)
12-Month EPS: Total Ops. (Display Only)
Last Price >= 15
P/E Ratio: 5-Year Avg. (Display Only)
P/E Ratio: Current (Display Only)
P/E Ratio: 5-Year Low (Display Only)
Market Capitalization (Display Only)
Rev Growth Qtr vs Qtr >= 25
EPS Growth Qtr vs Qtr >= 25
ROE: 5-Year Avg >= 17

I also published my favorite Morningstar Fund Screener awhile back, if you’re interested.

Here is a post I wrote on the forums page which will show you that there are a lot of ways to get ten baggers on Wall Street.

The greatest investment record on a percentage basis after Warren Buffett goes to a guy called Walter Schloss and he used the following system to record so many ten baggers that he drowned in them. In 28 years he achieved a compounded return of 23,104% vs. 887% for the S&P 500. If you had invested $10,000 with him in year one you would have had over $2.3 million in year 28.

Here is what I wrote;

I was originally introduced to Benjamin Graham after reading about him in John Train’s “The Money Masters”. I eventually mastered his theory on Net Net Working Capital Investing which is simply

NNWC = [ Net Current Assets-Total Liabilities ]/Diluted shares outstanding

That formula was a simple way to determine what the liquidation value of a company was per share. Being that the market is so inefficient there were times when you could find stocks selling for less than their liquidation value. If you could find a stock selling for 66% or less of its NNWC you could make a killing if the stock turned around and became profitable.

Warren Buffett made his first $100 million using NNWC and one of the greatest investors in history, Walter Schloss used it exclusively for years.

Due to the emergence of the Internet and the ability for anyone to access the files of companies, NNWC plays have been harder to find. I have thus been forced to tweak Graham’s theory a bit to bring it into the 21st century.

Here is my version;

[ Cash (100%) + Accounts Receivable(75%) + Inventory(50%) + P&E(50%)] – Total Liabilities
_____________________________________________________
Diluted Common Shares Outstanding

An example of this theory working successfully can be found by analyzing Hologic (HOLX) back in 1999.

Here is the SEC filing from 1999 that I used to analyze it. Just scroll down to the balance sheet and you will find the numbers to put into the formula.

http://www.sec.gov/Archives/edgar/data/859737/0000859737-99-000020.txt

When you follow the formula you get these results for Hologic.

Cash (100%) = $38,376,000
Short Term Investments (100%) = $19,786,000
Accounts receivable (75%) = $22,814,000
Inventory (50%) = $9,984,000
P&E Gross (50%) = $29,098,500

Totals = $120,058,500

Total Liabilities = $27,881,000

$120,058,500 – $27,881,000 = $92,177,500

Common shares outstanding = 15,296,489

$ 92,177,500/15,296,489 = $6.03

Thus the total liquidation value for HOLX back in 1999 would have been $6.03 a share.

At 66% or two thirds of this value you would need to buy the stock at $3.98.

Not only did the stock drop to that price but it dropped even lower. So you could have been a buyer from $$3.98 down to $2. Always remember just because you are buying something at 2/3 of its liquidation value does not mean it won’t drop to 1/3 of that value before things turn around.

If you look at the current price of HOLX you will see that you would have made a killing in the stock. Today it closed at $46.72 which would have given you a 7 year return of 1073% or an annualized return of 42.16% per year.

When buying NNWC’s you must diversify over at least 50 different holdings because many will go out of business and not turn around. But over time and with enough patience Benjamin Graham’s theories are as powerful today as they were in 1934 when he wrote Security Analysis.

This is a good pick. I only see a couple of problems with it.
1) the Brooks family controls most of the voting shares (the matricarch controls about 30%)
2) they are sensitive to commodity prices (like oil).
3) they don’t have a brand name/franchise value/moat
4) I’d rather see them use free cash to grow the business instead of for a stock buy back.

Still, I liked it enough to buy into it because
1) good relationship with Lowes
2) investing in capacity that will allow them to use other sources of plastic if the current ones they use become too expensive
3) not followed by analysts yet
4) increased earnings

Hi Chris

I took at look at AERT balance sheet and for the last 3 years, their retained earnings had been negative, even though the overal shareholder equity looks ok.

How should one interpret the negative retained earnings ?

thanks
kerming

Retained earnings represent the cumulative profit or loss over time – in this case a loss carry forward from prior years.
Look at how the number changes from year to year. If the number is growing (in this case the loss is increasing) then the company is probably making money.
What you care about is the year to year change – which reflects increase of profits (or losses if negative). Not whether it happens to be positive or negative at the moment.
In this case you can see that over the past year the retained earnings has increased (the loss is smaller), and the shareholders equity has increased – quite significantly. I take this as a very positive sign.

A – Almost everything dropped in price this week 🙂
B – They got mixed news on the lawsuit with Lloyds. Bad news was that the Lloyds coverage was capped so they won’t recover over the policy limits and certian costs. Good news was they are going to trial on the rest and still have the possibility of punative damages.

thank u so much for posting (aert) this stock has been very exciting i found this little baby when it was $1.74 and stuck with it since this stock needs more attention ,keep it coming

There’s been some valid points made about AERT, and here are my thoughts. Please tell me if you think my arguments are unsound.

1) Having the family own 30% of the stock isn’t a bad thing. First because it decreases the float, which restricts stock supply. When insiders own stock, the float (or short-run supply) is decreased because insiders must go through a registration process to sell shares. Restricted supply is one of the prerequisites to “tiny rockets” according to Jim Cramer. See this article from the SEC:
http://www.sec.gov/answers/form345.htm

30% insider ownership is also good because the family, who also runs the company, has a vested interested in the success of the company.

2) Weyerhaeser is not a customer, per se. Weyerhaeser and AERT are in a marketing partnership to sell the ChoiceDek line of composite lumber at Lowes. This means there is likely more stability in the relationship than if AERT was simply a supplier.

3) Based on the conference call, management of the company necessarily intend to purchase $3 million worth of shares back, they simply want the option if conditions become excessively favorable. From what it sounded like, if they were able to secure Economic Development funding from regional governments, something that was mentioned in the call, they would be able to use the planned funds to purchase shares back.

4) In regards to the recent Lloyd’s of London lawsuit, AERT won a partial victory last week, setting up AERT to collect at least part of their claim for the fire in their Junction, Texas facility. See here:
http://www.nwanews.com/adg/Business/160465/

This is not necessarily bad news, because the reconstruction loss should have already been built into the price after Lloyds refused the claim, so in my mind any partial victory will be good news for the price and the company’s cash flow.

5) In terms of the share equity and retained earnings, Dan is right in his answer. Retained earnings are cummulative since the founding of the company, so a company must build itself out of debt after its inital net earnings deficits. AERT is not exception and had a number of expensive startup years.

What you should watch is free cash flow, which has been very positive, these last couple years even after substantial capital reinvestment.

Let me know your thoughts!

Can someone post a link to the microsoft delux screener? For some reason I’m not able to find it on line. Know of a few good screeners but am curious to check this one out as well.

for those interested, screeners that i know & use are the following:

biz week screener
yahoo screener
reuters screener

TWP is Trex, which is a larger manufacturer of composite lumber products. After talking to my dad who claims to extremely dislike working with Trex products and then looking at the inconsistent financials, I decided that AERT seemed to have the makings of a hot growing company with smart leadership.

If you take a 2 X 4 piece ot Choice Dek composite wood, and a 2 X 4 TREX piece of composite wood, and place both in a tub of water overnight, you will find the TREX piece warped and not straight, while the Choice Dek is perfectly straight and without varriance.

Quality matters, and while the TREX has the familiar brand name, their quality is second to the Choice Dek, something the consumer will remember long after the deck is paid for.

AERT is very volitile and one must take a long term (3 years) view. They should benefit from the hurrican-related rebuilding in the south. It all seems logical but as we know, that doesn’t always matter. I watched it go from 1.55 to 3+ and bought 500 at 3.10. I am considering buying 1000 more at 2.55. Good luck to all.

AERT was not noticed under 2, but now will get analyist coverage and more institutional buying will come in, thus driving up the price. This stock is a little gem. Please be patient and buy more on weakness. Wood is good, but AERT is better. price target of 17 by 2008. just my opinion not advise. i am no expert. do your own homework. good luck.

The 52 week low of AERT appears to be 1.20. I’m wondering if you modified your MSN search listed to find this stock? You have listed 52 week low of 2. Thank you for reminding me about the deluxe screener as well. Tons of features in there.

Well, I now have 3 $1000 positions in AERT. 1 is up and 2 are down. I feel really good about the companies prospects although I havent’ sat down and spent too much time with the recent earnings reports.

The stock is volitile, so I’m going to keep it around for awhile, I think.

Chris,

AERT is run by 40watt and 30watt. Another words dumb and dumber. The mom inherited millions and mom’s boys are CEO’s and VP’s, not just managers.

Mom has another company called Razorback Farms. Son Steve is CEO of that company. So we had to have another company for Joe and Doug to be CEO and VP’s of. Hence son Joe basically stole the tecnology from Mobil Oil (TREX)company several years ago. He came home and said mom I’ve got this guy who can make rocket fuel out of cow shit.

Thus dumb and dumber got their company and their titles. Around Springdale everybody knows dumb and dumber!!!

Chris,

I just stumbled upon this article. All I can say is… Wow! It doesn’t appear you could have been any more wrong about this stock. If the current state of the economy and the housing industry weren’t enough (by the way — awesome insight by your dad about people spending MORE money on their homes during a time of home market softening — hah, brilliant!), AERT just had a class action law suit filed against them!! Priceless!!!

Ironically, it appears that since the day you wrote this, over two years ago, the stock has done nothing but DROP!

You, my friend, may be well advised to do a little ‘research’ into stocks before acting on a hunch. Better luck next time!

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