Written and copyright © 2010-2014 by Thomas N. Bulkowski. All rights reserved.
10-baggers are stocks that rise by at least ten times the purchase price within 5 years.
The 5 year time limit is arbitrary. This article discusses finding 10-baggers using fundamental analysis to select stocks.
I built a database of fundamental values and then mined that data to find fundamental factors that most 10-baggers shared. I searched through 974 stocks but found only
163 samples of 10-baggers from 1992 to 2007, using split un-adjusted data to get an accurate price representation. That's important since a stock valued at $30 today can
become $10 tomorrow after a 3 for 1 stock split. Any fundamental ratios, such as price to earnings, price to sales, and so on also change after a stock split. That's why it's
important to exclude splits (or compensate for them) from the analysis.
The details of this analysis is in my book,
Fundamental Analysis and Position Trading,
but here are some of the findings. Most numbers apply to the year before the 10-bagger began.
- Almost half (41%) of 10-baggers take a full 5 years to complete.
- 55% of the samples had a starting price below $5, but only 2% were below $1.
- The first year is when 10-baggers rise most.
- 77% were small caps. Market cap is shares outstanding times the current stock price.
- Half the samples had a price to book value below 1.5.
- Capital spending decreased 59% of the time from the year before the 10-bagger began.
- 35% of the time, the stocks had price to cash flow below 1.0.
- 91% of the stocks did not pay dividends.
- 77% had long term debt.
- Net profit, P/E ratio, and ROE are almost meaningless when searching for 10-baggers (because many companies were unprofitable).
- 53% of the stocks had price to sales ratios below 1.5
- 51% had return on equity below 12%.
- The number of shares outstanding climbed in 84% of the samples.
- Which industries had the most 10 baggers? Semiconductors (first), home builders (second), internet, and semiconductor capital equipment.
The best time to go shopping for 10-baggers is just as or just after a bear market ends.
Using the following criteria on split un-adjusted stocks found 104 samples with gains average 585% over 5 years. Twenty-eight (27%) of them were 10-baggers, but 6% showed
losses averaging 26% over 5 years.
This list is slightly different from that published in the book because I allowed almost all of the samples through here but the book uses a cutoff of 66% to
weed out the poorer performing fundamentals.
- Purchase price: $1 to $5.
- Small caps only (stocks worth less than $1 billion).
- Price to book value: less than 4.0.
- Price to cash flow: less than 6.0.
- Price to sales: less than 1.5.
- No dividends
-- Thomas Bulkowski
Written and copyright © 2010-2014 by Thomas N. Bulkowski. All rights reserved. If all the world's economists were laid end to end, they wouldn't reach a conclusion -- William Baumol.