10 Bagger – Can You Find One? – Week In Review

10 Bagger – Can You Find One?

10 Bagger – Can You Find One? In 1989 Peter Lynch, the famed fund manager of the Fidelity Magellan Fund, published a book entitled “One Up on Wall Street.” I have read this book several times, and it may have been the first investment book that I have read. In this book, Peter Lynch talks about 10 bagger stocks. He had a lot of experience in the subject. The Magellan Fund generated total annualized returns between 1977 and 1990 of ~29%. If you invest in a few stocks that turn into 10 bagger stocks in your portfolio, your returns will likely be excellent throughout your investing career. It seems easy these days, too, to buy a tech stock, and it goes up. In reality, though, it is not as easy as the financial press makes it sound.

What is the Meaning of a 10 Bagger?

On page 15, Peter Lynch talks about “Those Wonderful Tenbaggers” To quote him:

“In Wall Street parlance, a ‘ten bagger’ is a stock in which you’ve made ten times your money. I suspect this highly technical term was borrowed from baseball, which only goes up to a four bagger or a home run. In my business, a four bagger is nice, but a ten bagger is the fiscal equivalent of two home runs and a double. If you’ve ever had a ten bagger in the stock market, you know how appealing it can be.”

A 10 bagger is a stock that has experienced a 900% increase in the stock price or market cap, a 10X increase. It is a stock that appreciates 10 times your initial purchase price. For example, Apple (AAPL) was priced at a split-adjusted price of $0.43 in mid-2001. If you bought Apple stock in 2001, you would have had a 10 bagger many times over and likely be a millionaire. However, stock selection is only half the challenge in picking a 10 bagger or even a 100 bagger. The other half is having the patience to hold onto the stock.

Peter Lynch has a whole chapter on “Stalking the Tenbagger”. He discusses some 10 bagger stocks, but he also talks about all the 10 bagger stocks he missed buying or sold too early.

Probability of 10 Bagger

There is about a 15% or 1-in-7 chance based on a study of Australian and New Zealand stocks over a 35-yer period. The is about a 2.3% or 1-in-50 chance for a 100 bagger in the same time period. The average time required for a stock to become a 10 bagger is 10 years. This period is long, but the number of years varies depending on the sector and industry. Similar probabilities likely occur in the US stock market.

Examples of 10 Bagger Stocks

You do not have to try too hard to list examples of 10 bagger stocks. Facebook (FB) was one if you bought it when the stock price dropped after the IPO in late 2012. Facebook had rapid growth and a product no one else had social media. Intuitive Surgical (ISRG) was another. The company is a pioneer in robotic surgery. Teledoc Health (TDOC) was another as it innovated in telemedicine, started to buy competitors, and had a tailwind from COVID-19. Netflix (NLFX) was another company that led in streaming TV gained scale and had a tailwind from COVID-1Finally, 9. Tesla (TSLA) was another as the company that innovated in the electric vehicle market.

It is not necessary to be in the IT or med-tech space for a stock to become a 10 bagger. It is also not essential for a company to be new or near its IPO. For example, Domino’s Pizza (DPZ) became a 10 bagger stock between 2009 and 2019 even though the company just sold pizza and was around for decades. Domino’s Pizza changed its pizza recipe and was the first pizza chain to launch its ordering app. Customers ordered pizza in droves during the pandemic as well and the price has gone up since 2019. Domino’s Pizza has also paid a dividend since 2004.

Other relatively recent examples of 10 bagger stocks include Regeneron (REGN), Sirius XM (SIRI), Tractor Supply (TSCO), United Rentals (URI), TJX (TJX), Ross Stores (ROST), Costco (COST), Amazon (AMZN), Monster Beverage (MNST), Microsoft (MSFT), Trex (TREX), Visa (V), Mastercard (MA), Starbuck’s (SBUX), etc. Some of these stocks are dividend growth stocks as well. I am long several of the stocks listed in this article.

The above list is even more extensive if we go back before the Great Recession to the dot-com boom and bust era or look at companies that were acquired and no longer listed on a stock exchange.

Characteristics of 10 Bagger Stocks

It is challenging to know which stock will become a 10 bagger or even a 100 bagger a priori. The problem is that some seemingly successful companies falter, or the CEO changes and he or she lacks vision and operational execution. There are, however, some common characteristics of 10 bagger companies.

These companies need to be innovators. This means doing something that no other company is doing. This innovation could be a new drug or device in the pharma or med-tech space. Or a new retail concept like Costco or Tractor Supply. The new product or service must replace an old one with something better.

These companies need to be disruptive. It is not necessary to be disruptive to the level of Apple and the smartphone or Tesla and EV cars or Monster Beverage and energy drinks or Trex and decking material. The level of disruption also depends on the industry. For instance, Costco is a retailer but offered low prices and convenience in a warehouse. Domino’s Pizza disrupted its industry by improving taste, quality, and the delivery ordering experience.

Lastly, companies need to retain their advantage. It takes a long time, often many years, for a stock to become a 10 bagger. To allow for time to pass a future 10 bagger must retain its edge and competitive advantage. This is essentially building and keeping a moat. A company only becomes a 10 bagger or more if they can grow revenues and earnings for many years.

Final Thoughts on 10 Bagger – Can You Find One?

It is not necessary to have an entire portfolio full of 10 bagger stocks to be a successful investor. A few 10 bagger stocks combined with good dividend growth stocks is probably enough to generate solid returns over time. It will help you build your portfolio to $100,000 and beyond. In addition, you do not need to shoot for the moon. The trick is to allow your returns and dividend growth to compound over time.

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Chart or Table of the Week

Today I highlight Hormel (HRL). The stock price is in bear market territory and was down approximately (-20%) this week from its 52-week high. The stock price is down over inflationary pressures resulting in higher input costs. Additionally, the company is experiencing labor shortages negatively impacting volumes. The company is countering by raising prices which resulted in higher revenues despite lower volumes in Q3 2021. Hormel acquired Planter’s another $1B+ brand as a growth platform in snacks. The company has been a 10 bagger but it took about 20 years from the end of the dot-com boom. Hormel is a long-time dividend growth stock with 55 consecutive years of annual raises. The company is a Dividend King and is one of the safest Dividend Kings. The dividend yield is the highest it has been in a decade. Valuation is reasonable but not a deal.

The screenshot below is from Stock Rover*.

Dividend Increases and Reinstatements

I have created a searchable list of dividend increases and reinstatements. I update this list weekly. In addition, youYou can search for your stocks by company name, ticker, and date.

Dividend Cuts and Suspensions List

I updated my dividend cuts and suspensions list at end of August 2021. The number of companies on the list has risen to 531. Thus, we are well over 10% of companies that pay dividends, having cut or suspended them since the start of the COVID-19 pandemic.

There are three new companies added to the list this past month. These three companies are Eneti (NETI), International General Insurance (IGIC), and Washington Real Estate (WRE).

Market Indices

Dow Jones Industrial Averages (DJIA): 34,608 (-2.15%)

NASDAQ: 15,116 (-1.61%)

S&P 500: 4,459 (-1.70%)

Market Valuation

The S&P 500 is trading at a price-to-earnings ratio of 34.8X and the Schiller P/E Ratio is at about 38.5X. These two metrics were down the past week. Note that the long-term means of these two ratios are 15.9X and 16.8X, respectively. 

I continue to believe that the market is overvalued at this point. I view anything over 30X as overvalued based on historical data. The S&P 500’s valuation came down as companies in the index reported solid earnings lapping a Q2 2020 that had depressed earnings.

S&P 500 PE Ratio History

Source: multpl.com

Shiller PE Ratio History

Source: multpl.com

Stock Market Volatility – CBOE VIX

The CBOE VIX measuring volatility was up 4.5 points this past week to 20.95. The long-term average is approximately 19 to 20. The CBOE VIX is a measure of the stock market’s expectation of volatility based on S&P 500 index options. It is commonly referred to as the fear index.

Source: Google

Fear & Greed Index

I also track the Fear & Greed Index. The index is now Neutral at a value of 34. This is down 20 points this past week.

There are seven indicators in the index. They are Put and Call Options, Junk Bond Demand, Market Momentum, Market Volatility, Stock Price Strength, Stock Price Breadth, and Safe Haven Demand.

Junk Bond Demand is indicating Extreme Greed. Investors are accepting a 1.95% yield over investment-grade corporate bonds. Moreover, the spread is down further from current levels indicating that investors are taking on more risk.

Put and Call Options are signaling Fear. In the last five trading days, put option volume has lagged call option volume by 55.98%. This is amongst the lowest level of put buying in the past two years.

Market Momentum indicates Fear. For example, the S&P 500 is 4.75% over its 125-day average. This is indicating that investors are slowing their rate of investment.

Market Volatility is set at Extreme Fear. The CBOE VIX reading of 20.95 is neutral. This is 19.19% above its 50-day average.

Stock Price Breadth is indicating Extreme Fear as declining volume is 5.57% more than advancing volume on the NYSE during the last month. This indicator is near the lower end of its range over the past two years.

Safe Haven Demand is in Extreme Fear. Stocks and bonds are performing similarly over the past 20 trading days. Unfortunately, this is amongst the weakest performance for stocks.

Stock Price Strength is signaling Extreme Fear. The number of stocks hitting 52-week highs compared to those hitting 52-week lows is at the lower end of its range.

Source: CNN Business

Economic News

The US Bureau of Labor Statistics Job Openings and Labor Turnover Survey, or JOLTS, reported a record 10.9 million job openings as of the last day of July, bettering an upwardly revised 10.2 million in June. The record number of job openings were driven by health care and social assistance (+294,000), finance and insurance (+116,000), and accommodation and food services (+115,000). The job openings rate rose to 6.9% and hires dipped slightly to 6.7M.  The number of vacancies topped hires by 4.3M in July, the most since 2000. Hiring increases came in state and local government education (+33,000) and federal government (+21,000). Decreases came in retail trade (-277,000), durable goods manufacturing (-41,000) and educational services (-23,000).

The US Energy Information Administration reported that US commercial crude oil stockpiles decreased by 1.5M barrels to 423.9M barrels (6% below the five-year average) for the week ending September 3rd. Crude oil refinery inputs averaged 14.3M barrels per day, a decrease of 1.6M barrels per day compared to the previous week’s average. In addition, gasoline inventories declined by 7.2M barrels (4% below the five-year average,) while distillate inventories fell by 3.1M barrels (12% below the five-year average). Refineries operated at 81.9% of their operable capacity.

The US Bureau of Labor Statistics reported the US producer price index up 0.7% in August, after increasing 1.0% in July. As a result, the US PPI is up a heady 8.3% for the 12 months ending in August, the fastest rate since November 2010 and follows an already substantial 7.8% increase in July.

Thanks for reading 10 Bagger – Can You Find One? – Week in Review!

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