How to find 10-baggers

According to the study Global Outperfomers

Feb 16

A 10-bagger of a company returning 1.000% is in investing equivalent to catching Moby Dick. It is improbable it will happen; if it happens, you probably don’t have many of them. The good news is you don’t need to have many of them; one to three could be more than enough if you allocate a substantial amount of your capital to that 10-bagger.

I will in this article summarise a study and highlight the most important numbers and insights for companies returning over 1.000% from 2012 to 2022. In the end, I will give my perspective on finding 10-baggers and the conclusions from the study.

Let’s start by jumping into Jenga’s study!

First, some stats about the study

446 companies have returned more than 1000% from 2012 to 2022.
India has been the best-performing country since the start of the 21st century.
Isreal and Sweden are two outliers when it comes to 10-baggers to population.
A lot more companies underperformed and then overperformed.
367 companies (82,3%) were profitable at the beginning of the study.
79 companies (17,7%) had no revenue or were unprofitable on EBIT at the beginning of the study.
74% of the profitable companies grew their earnings faster than their revenue, emphasizing the importance of margin expansion when searching for overperformers.
The average profitable company compounded its revenue by 15%
CAGR and its operating earnings by 20% CAGR.
50,7% of the companies had an EV/Revenue below 1x
67,9% of the companies had an EV/EBIT multiple under 15x
91% of the companies say their EV/Revenue multiple expand
72% of the companies profitable in 2012 saw their EV/EBIT multiples expand
72,8% of the companies were smaller than $300m in market cap in 2012

It is important to remember “history doesn't repeat itself, but it often rhymes,” as past performance does not indicate future performance. Only 23 of the 446 companies had a performance of 1.000% in the ten-year follow-up to 2012 (between the 31st of May 2002 and the 31st of May 2012). However, from history, we can see the drivers for different outperformers and try to find the same characteristics in a new company. It is increasing our ability to find performance and alpha in the market.

I particularly like this part from “Global Outperformers” about investment styles or, as Peter Lynch says, different stories:

For the case studies, you will notice that each of the five fundamental investment styles was represented (compounders, cyclicals, turnarounds, stalwarts and special situations). We reviewed compounders like Tesla and ANTA Sports that managed to grow their business year-on-year over very long periods. Some were cyclical opportunities like Ganfeng Lithium and SRF Limited, which had their earnings growth highly dependent on the business cycles of their respective commodities. There were also turnarounds like Trex and Adobe, where management had made some mistakes with operations but found ways to restore growth and market leadership.

Some companies like Airports of Thailand and Sony Group were slow growth stalwarts but produced market-leading returns due to their significant discount to intrinsic value. There were special situations like MSCI, a financial data group spun off from its parent company, Morgan Stanley, in 2007. It was also common for companies to transition across various investment styles over time. Britannia Industries, the Indian biscuits market leader, provided a great example as it moved from being a stalwart to a turnaround and later became a growth compounded.

It is essential to highlight that Jenga focused on how growth, earnings, multiples, size, industry, and geographical region impacted the outperformance to find what made these companies increase by over 1.000%.

Let’s jump and see what data the study came up with.

First, we jump in on valuations, as we may have had a decade where valuation didn’t matter; it can be possible to start with.

And we have a result, gents and ladies! Valuation mattered!

The companies that started in 2012 with a low valuation were in the majority! Companies with a valuation lower than 1,5x EV/R composed 76,1% of the subset, and the profitable companies with a valuation lower than 15x EV/EBIT constituted 67,9% of the subset.

Meanwhile, I think it is important to point out as this study studies the outcome of companies that return 1.000% (survivorship-biased) that, we can see an increasing earnings growth as the valuation increases—being in line with the common knowledge that higher multiple valuations increase the company's expectations on growth and profitability. For example, Amazon is one of the highest-valued companies in the subsets.

Let’s look into profitability.

Also in contradiction to the mental attitude, many have had during the last years. Profitability is essential; of all the 446 companies, 82% were profitable. Looking at the unprofitable companies, only three were unprofitable companies during the period; two were healthcare companies, and the third was Plug Power. Of the unprofitable companies with no revenue (not operational), 17 of the 21 companies came from the materials, energy, and healthcare industries. Making a lot of sense since the exploration of resources takes a lot of time to set, and to develop a drug takes many years to conduct the clinical-trial and pre-clinical trials, which are needed to get the drug approved by authorities. The operational with prior profitability was mainly represented by two types of companies, cyclical and companies that went through company-specific crises.

When also looking at the margin's evolution, it expanded significantly.

Companies with profitability above 10% were 48%; meanwhile, by 2021, it increased to 85%. Looking at companies above 20%, it was 17%, and in 2021, it increased to 47%! Showing that margin expansion may be a major driver of value.

Looking at the growth, it was somewhat surprising that fast growth only was 28% of the 446 companies. Fast growth was defined as 20% CAGR during the ten years; however, 20% CAGR for 10 years is very hard to achieve.

As this is a study of winners (companies having returns above 1.000% in ten years) and growth is needed to perform that kind of returns, these companies have had. So the fast growers in both revenue and earnings are more say in which ones are the best of the winners than giving us any clue to find a 10 bagger. The most impressive feat is the companies that only achieved earnings growth during these ten years with no revenue growth.

The most impressive number is the average profitable company compounded its revenue by 15% CAGR and its operating earnings by 20% CAGR. It shows the effect of scalability and the economics of scales.

One familiar take on investing for high returns in companies is that small companies have a better chance of producing those returns. It is hard to double 100 million than 10 million by sheer size. The data in Jenga’s study support this notion, as 63% of the subset group was smaller than $50m, and as the size increases, the number of companies decreases. Shows a clear correlation between size and high performance. However, this table can also illustrate the risk/reward relation that correlates with the size of the companies. Bankruptcies and low-performing stocks are probably also overrepresented in the Nano caps and Microcaps.

Looking at the top 15 countries the 10 baggers come from, it is interesting that India is leading by quite a lot. Also impressive that small countries such as Sweden and Isreal are up there.

The top five industries constitute 79,1% of the companies, with Information Technology performing the strongest. Information technology, healthcare, and materials outperformed relative to the representation in the public market.

When looking at the table, one investor needs to remember it is highly affected by consumer trends, innovation, and other structural trends impacting the industries positively and negatively. Semiconductors did, for example, have one outperformed in 2002-2012 while it was 44 companies in 2012-2022.

To summarize the above characteristics of the secret recipe (or at least to increase the chances) for finding 10 baggers, it is as follows:

Valuation below 1,5x EV/R and 15x EV/EBIT
Profitable
High chance of margin expansion
Expecting earnings growth
Under $300m in market cap
Looking for companies in India, USA, Japan, China, and Sweden
Look for companies in industries that have secular trends
Look at the information technology, healthcare, and materials industries

However, it is important to reflect on the below paragraph from the study.

With the information gathered from a key factors perspective, it may seem like a magic quantitative formula could be created to invest in outperformers, but this is far from the truth. Had we combined all our learnings across profitability, growth, multiples and size and invested in companies that had the metrics and features of most outperformers, i.e. EV/Revenue <1.5x, EV/EBIT <10x, earnings growth of 15% CAGR (assuming we could see the future), a market capitalisation of less than $300 million, we would have still missed 54% (504 of 935 companies) that later returned 1,000% over the following ten years.

The ten lessons from the study:

Open-mindedness and flexibility
The outperformed came from all kinds of business models and growth profiles. By setting a limit on yourself, you will miss a lot of potential 10 baggers and 100 baggers.
The future is Asia
Asia is the fastest-growing continent, with large populations and a growing middle class. This has been reflected in the GDP increase compared to Europe and USA. Asian equities are also under-researched and under-owned globally, as Asia only represents 10% of global mutual fund portfolios.
The strengths and pitfalls of thematic investing
Thematic investing is excellent for directing research to a theme that can perform well if you have a well-thought-out theme process. However, for every winner in the theme, there are losers. So it is essential to remember to focus on the fundamentals. Themes can be a good screening tool, but it is not a substitute for a thorough due diligence process and thinking the sea will raise all boats.
Value chain investing
Themes investing and screening have flaws, especially when new industries are born. It can be helpful to apply a value chain investing process to capture those companies which revolutionize how we do things. For example, screening for companies below an EV/EBIT multiple of 10x would be missing Amazon.
Disciplined optimism
Stay focused on a company's fundamentals no matter the noise macro does around the world. Greece produces as many companies as the Netherlands despite the debt crisis. Japan fell into a recession in 2014 but still had 49 outperformers. Have ice in your stomach and trust in the due diligence you do for the company.
Long-term and patience
To capture a 10-bagger, you need a long-term mindset and patience, as it takes time for a company to compound. Also, 36% of the companies had a negative return in the first two years. However, it should not be forever, as only 18% of the companies performed 1000% between 2002 and 2012 and returned above 500% between 2012 and 2022.
Cyclical growth
Many investors avoid cyclical sectors and leave a lot of return on the table, as 47% of the global outperformers came from cyclical industries. A common notion is that cyclical companies need to be timed perfectly; meanwhile, the study shows that you have more than enough time to buy the share and have a high return.
Turnarounds
They were a significant portion of the outperformers, and for a turnaround to be successful, they need the following:
• Identifiable and solvable problems
• Measurable indicators to gauge turnaround progress
• High potential for upside (mainly due to negative market sentiment)
Nick Sleeps has an excellent framework for turnaround investing called destination analysis involving:
• The distance the company needs to go to be a turnaround.
• The speed and time it takes to travel the distance
The faster it arrives at the destination better it is. Turnarounds due to market slumps can benefit the company when it emerges from the crisis. As ANTA Sports did, due to the market conditions, many competitors went bankrupt, leaving a larger market share for ANTA Sports and less competition.
Creativity and imagination
Both skills are needed in investing to see the opportunities and investment cases. One idea can lead to another idea, creating ripple effects. An excellent way to develop investing creativity is by studying history and studies like this.
Turning over new rocks
In order to find new 10-baggers, an investor needs to turn over more rocks. The idea of finding a company that overperforms for two decades is a meager chance of finding. Only 23 of the companies in the 300 that performed over 1000% between 2002 and 2012 were among the outperformers in 2012-2022.

Looking at the valuation, only 12.5% of the profitable companies that had a valuation below 10x EV/EBIT had a valuation under 10x when the study ended. Similarly, we see it with EV/R as only 4.7% of the subset with a valuation under 1x still had it by the end of the study.

My conclusion

As I have written in my article The three boxes to check for the perfect case, the study confirms that growth, margin expansion, and increased valuation are essential to driving returns.

Let’s start with what I missed in the study.

Data on issuing shares and how that affected an investor initially and during the investment period.
The skin in the game from the founder, board of directors, and management. However, 67% of the companies had insider ownership above 5% compared to 49% of the broader market.
A combined factor analysis to see what drove most of the returns between expanding multiples, margin expansion, and growth.
ROIC analysis to better understand the capital allocation in these companies.

In general, the results are not that surprising. The fundamentals drive the returns of the companies, especially when looking at a period of 10 years.

The characteristics derived in the study will increase the chances of finding 10-baggers. However, as Jenga stated in the report using all when doing a screening would exclude 54% of the outperformers. Therefore, an investor should probably only use 1-3 characteristics when using a screener. Also, thematic investing is something I use to get ideas for where to search for new cases, and the study confirms this is the right approach, as not all companies in a theme become winners. Therefore the cluster approaches (buying five companies within an article or a thematic ETF/mutual fund) many uses to get exposure to a theme may not be a winning strategy.

It all comes down to the individual research of the companies and knowledge about the sectors. This study had 446 companies that performed 1000%. An investor would only need 1-3 of these in its portfolio to have outstanding performance. The study suggests that an investor should be open-minded and open to investing in any investment case, geographical area, industry, and business type. I recommend an investor who is an expert in a particular area (hopefully the right place, geographically or by industry) over someone who tries to learn a little bit everywhere.

I, for example, excluded Chines companies, commodity/material companies, and turnarounds as I think the risk are larger there as a whole. Of course, I know I will miss some 10 baggers there, but there are enough baggers for me to find anyway.

I have found three stocks returning over 1000% for me during my twelve years of investing: Evolution, Vitrolife, BICO (formerly Cellink). But I have missed a few; some were mentioned in the study. Some of them I bought too late to be a 10-bagger, and some I sold too early. Vitec, Biotage, Netflix, Amazon, SalMar, Bakkafrost, Bure Equity, and Cellavision. Do you have any in your portfolio? or have you missed any of them?

What do you take with you from the study? Comment below if I missed something or if something did harmonize with your view on investing.

I highly recommend reading the case studies!

Investacus

How to find 10-baggers

According to the study Global Outperfomers