💸 How to find multibaggers
It's the dream of every investor to make a 10-bagger (a stock that goes up tenfold), or even a 100-bagger (a stock that goes up 100x).
Alta Fox Capital studied more than 100 (!) multibaggers. In this thread, we will go through the 8 characteristics almost every multibagger has. Start to learn here ⬇️
Lesson 1: Look for business with a wide moat
A wide moat is essential for every Quality Investment.
Almost all multibaggers (91%) are characterized by a wide economic moat. Barriers to entry are the most preferred moat source for multibaggers (81%).
Lesson 2: Invest in financially healthy companies
Great companies are very cash-generative and have a healty balance sheet.
Seek for companies with a low net debt / EBITDA and high interest coverage. When the company has a net cash position (more cash than debt), this is a great surplus.
Lesson 3: Acquisitions can create a lot of value
While many acquisitions fail to create value, the best performing stocks often use acquisitions to bolster their returns.
If you want phenomenal returns, find companies that are great acquirers. Constellation Software, Roper Technologies and Lifco are beautiful examples.
Lesson 4: Don’t rely on multiples
When you want to buy something great, you have to pay for it.
While it’s always better to buy a great business at a low multiple rather than a high one, many of the top performing stocks started compounding with multiples which were already high. Those multiples often expanded even further over time.
“'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – Warren Buffett
Lesson 5: Invest in small caps
In general, small cap stocks perform better than large cap because they have more upside potential.
When you can find an owner-operator small cap stock which is a market leader in a niche with high margins, you have found a (potential) goldmine.
Lesson 6: Margin expansion is great
As a quality investor, you should love margin expansion.
When the profit margin of a company doubles, the EPS of the company doubles too.
In the long term, earnings growth is the leading factor for stock price performance.
Lesson 7: Let your winners run
The only thing you need during a succesful investment career, is a few big winners.
Between June 2015 and June 2020, the S&P500 returned 55,5% to shareholders. Zynex Medical, the best performing stocks over the studied period, returned almost 9200% (!) to shareholders.
Lesson 8: Revenue growth is the most preferred source of growth
Organic growth is the holy grail for quality investors.
When you can buy companies which can reinvest a lot of their free cash flow in organic growth opportunities at high margins, the company’s earnings will explode over time.
Do you want to learn more? Find 104 (!) concrete examples here
Alta Fox Capital made more than 600 (!) slides on the characteristics of multibagger stocks with 104 (!) concrete examples. You can download them for free here:
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About the author
Compounding Quality is a professional investor which manages a worldwide equity fund with more than $125 million in Assets Under Management. We have read over 500 investment books and spend more than 50 hours per week researching stocks.