Art of discovering stocks that can give 10X returns
Motivation
When Columbus discovered “The Americas” he was not searching for it, he was trying to find a direct route from Europe to Asia. If you see it as an investment in 1492, it has compounded and valued 1000X+ (x is the original amount. :)) today. Anyone who had guessed it then, was a futurist. This reminds me of the following quote,
“You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something — your gut, destiny, life, karma, whatever. — Steve Jobs, CEO Apple
If we see Apple or Amazon stocks today, they did not become $1T+ company overnight. They went through ups and downs in their valuation journey and ended up here.
If you think you will just invest in Apple or Amazon today— the growth will be much slower than investing in a 10M or 100M company. So, let’s find future Amazons and Apples, as we all want a better return on investment (ROI).
The goal in this document is to identify the companies with strong fundamentals, keep a check on them and see them grow year over year.
The Research
Gone are the days I invested in large caps. I recommend a balance between large and small caps. My fundamental research is simple and it consists for 5 aspects I examine in a company before investing,
- Innovation Premium
- Profitability
- Growth
- Market Capital & valuation
- Market sentiment
Innovation Premium — Not all companies are minting profits from day one. So usually I try to balance out innovation premium with profitability. Between 2018 to 2020, Tesla was not profitable. Many people thought of Tesla as a bubble, but if you looked deeper market was paying innovation premium for Tesla stock. So don’t worry if a company doesn’t checkmark the next fundamental(Profitability). These are the fields in which market is ready to pay a hefty premium — Medical devices (Blood sugar in your FitBit, Robotic brain surgery), EV — Fully autonomous Electric vehicle, Data SaaS, Digital marketing etc. Read more in my blog post for more details on this: Top 5 Industry trends to watch out for in 2021.
Profitability — Every for-profit company needs to make profit. Sooner the better, but some CEOs like to reinvest in early stages of the company so that the hockey stick growth is inevitable couple of years down the line.
If you read about CEOs — Jeff Bezos, Amazon or Reed Hastings, Netflix. They advocated for taking a price hit in the stock instead of optimizing for market or making it happy in the short term. They always discussed about long term goals and company’s vision.
So, either a company is profitable or lookout for signs to profitability. i.e. they beating their EPS estimates or they are converging on losses Q/Q. I have seen Pinterest, Tesla, Dropbox converging losses and all are now profitable.
Pro tip: Identify convergence ASAP, coz Market likes it when it is profitable for 4 Quarters in a row, the stock price will shoot up.
Growth — Growth is important for a company. I will make the job easier here. If a company is not growing in Revenue(sales) or profitability or expanding markets, just skip it. Some companies revive themselves such as GILD(Gilead Pharma) with their COVID-19 Therapy “Remdesivir”, gave a boost to their declining sales.
Market Capital and Valuation — It is the hardest part of the research. You want to make sure you are not overpaying for a company. i.e. You are not buying a $5 Toothbrush at $50 price. Sometimes it makes sense, make sure you back it with data.
Market Capital = Stock Price * No. of stocks outstanding
Valuation of a company is like the price of appreciation of your jewelry or a piece of land you own. Some people get mistaken by equating Market Cap == Valuation. Valuation can be greater than or less than the market cap. Stock market is self adjusting and it takes a while before it gets the equilibrium set up for “MARKET CAP=VALUE”. There is always a pendulum which either sells off or oversells a stock.
Industry valuation trends
Valuation triplet: <Market Cap, Market cap = X Times sales, Future valuation 2030>
- Large Cap Tech: Amazon — <1.65T, 5X, 5T+>
- Chipset: TSM — <585B, 12X, 2.5T+>
- Cutting-edge Medical devices: DXCM(Blood sugar IoT)- <39B, 18X, 100B+>
- Robotics: IRBT — <3B, 2X, 30B+> (Highly undervalued)
- Innovation: GRWG (Hydroponics) — <3B, 20X, 100B+>
- Data Software company: PLTR — <55B, 55X, 250M+>
- EV: TSLA — <783B, 20X, 2T+>
- WFH Economy- UPWK — <7B, 20X, 70B>
Market Sentiment — Many people miss out on this one. Market sentiment for a stock keeps changing. So, I would suggest you to stay up-to-date with that. For example, Shopify was the fastest growing stock back in 2020, but it has slowed down in 2021 as it is reaching a plateau. You can read through StockTwits posts, Avg. daily volume and analysts rating for sentiments.
Pattern
I have identified following patterns over the period:
- Large companies have steady growth but slow. E.g. It takes a longer period for a 1T company to multiply 2X, compared to a company with $100M to got 200M.
- People are ready to pay for innovation premium, so I don’t include profitability for valuation.
- Revenue growth will increase valuation of the company. As investors are always happy to pay multiples of sales.
- 100% Revenue growth, profitability and low valuation is a perfect combo.
My Move
Once I have identified these parameters about a company, I rank the companies from most highly undervalued to Overvalued companies. Voila, and buy stocks for low valued ones.
Let me share you a preview of 5 companies which can go 10X super quickly:
- iRobot(IRBT): With Market cap equals to 2X sales, make it undervalued. Boom in Robotic innovation makes this sector poised to grow too quickly. Despite strong competitions iRobot has continued to beat profits every quarter. With Current market cap 3B, it has potential to go 30B. i.e. 10X growth.
- Pinterest(PINS): With 52B market cap, it is cheap. Pinterest recently became profitable and they are just hitting of the ball out of the stadium. It is great combo of Social+Advertising+E-commerce. Pinterest stock doubled in less than 6 months. I feel Pinterest will be 500B+ company in future. Again 10X growth.
- DexCom (DXCM): Do you know how many people have diabetes in the world? 422M people in this world have diagnosed with diabetes. This company makes IoT devices to monitor Blood sugar level without any invasive procedure. Given 40B market cap and 2B sales, this company is undervalued. I think it can easily go 400B in few years. i.e 10X growth.
- Digital Turbine (APPS): Listed as “Deloitte’s 500 fast companies 2020 FAST” this has been and it is going to be fastest growing companies in the history of mobile engagement and advertising. Market capital at 7B, this thing can go up to 70B very soon. It is profitable, double digit growth it has just scratched the surface.
- GrowGeneration (GRWG): GrowGeneration owns and operates retail hydroponic and organic gardening stores in US. Given the market capital of 3B, it has room to grow up to 30B in few years and profitable.
If you want to know more about such companies follow me on instagram: https://www.instagram.com/stocks_lighthouse/
