Peter Lynch is one of America's great investors. If you haven't read his One Up on Wall Street yet, you're in for a treat. Lynch's down-to-earth language explains how the stock market works and how to find great companies in a way that even novice investors can understand. He explains how to turn what you already know into advantages that will help you beat the market.
What does Tenbagger Bean?
Lynch repeatedly encourages investors to find stocks which will double, triple, quadruple, or otherwise multiply your initial investment. He uses a colorful baseball metaphor to describe the search for a mythical tenbagger investment. He defined a tenbagger stock as one which gives a 900% return. In other words, investing $1,000 will become $10,000.
That's impressive. That's rare.
Lynch postulates that the metaphor comes from baseball ("I suspect this highly technical term has been borrowed from baseball, which only goes up to a fourbagger, or home run." Paperback, Millennium edition, p. 32), where a bag refers to one of the bases. A single hit would be a onebagger, a double a twobagger, a triple a threebagger. In the world of stocks, even a twobagger is a great success!
How Do You Find a Tenbagger Stock?
Where you find investments this good? Lynch suggests to look for an undervalued company with great growth potential. This is probably a small company with good financials looking to expand. Think of Wal-Mart in the early 1970s or Microsoft in the '80s.
A successful company with big potential is probably entering a new market altogether (Microsoft and PC software) or has a significant advantage (Wal-Mart and its logistics operations) to disrupt an existing market. It needs a strong competitive advantage and effective management, and its market has to be able to sustain dramatic year-over-year growth. (In other words, a company like Apple can re-sell relatively inexpensive consumer iPods and iPhones to millions of people every few years, as each previous generation becomes obsolete, while a company like Tiffany & Co can sell expensive jewelry to a much smaller market.)
Do tenbaggers still exist? They do, but you have to work to find them.
How to Find a Stock That Will Double — and More!
Stocks that will multiply in value have a few characteristics.
Finding an undervalued stock is relatively easier (but still not easy). Look for a company with a good market, a competitive edge (an economic moat), and solid financials (to sustain double-digit growth for several years).
Sometimes you can find this in companies which are turning around. These aren't penny stocks of companies facing bankruptcy, but companies which have had their share prices battered by poor financial results or just the whims of the market.
Small companies such as Nautilus or Jewett-Cameron (disclaimer: your author is long on both stocks at the time of writing) have performed nicely in the past couple of years because they were undervalued and largely overlooked by the market. On the other hand, Boeing more than doubled its price in two recent years (disclaimer: your author is also long on it) even though it's one of the largest companies in the world and a member of the DJIA.
There's no secret calculation to make, no target P/E ratio which signifies a potential multibagger. There are no weird tricks or shortcuts to instantly find stocks to quadruple your money.
As Peter Lynch says, you must research several stocks to the possibilities, then look at a few numbers and think about the businesses. You can find great opportunities in the market this way. Some will give healthy 10% or 20% annual returns, but once in a while you'll find an elusive two-, three-, or fourbagger. Maybe even a tenbagger or more, if you're careful and thoughtful and a little lucky.
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