76 - How to identify 10-bagger investments (10x in 10 years)

Mental Models discussed in this podcast: Operating Leverage Davis Double Play Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode76 How to identify 10-bagger investments A 10-bagger investment: We're going to focus on how to 10x your money over a 10-year time period. I'll discuss examples and what to look for in an investment in order to identify these types of opportunities. This represents a 25.8% annualized rate of return. (Massively exceeding the average 10% return in the stock market.) Example 1: "Davis Double Play" Grow an investment from $10 per share to $100 per share. If done over a period of 10 years we know this is a >25% rate of return. Starting EPS: $1, doubles every 5 years, so it ends at $4 per share. Starting buy price: $10 per share (P/E of 10.) Sell price: $100 per share (P/E of 25) - Find companies capable of becoming overvalued Earnings growth rate: 14.8% per year Multiple expansion contribution: 9.6% per year Example 2: Deep Value Starting EPS: $2.50 per share Ending EPS: $5.00 per share (7% growth rate) Starting price: $10 per share (P/E of 4) Ending Price: $100 per share (P/E of 20) (17% contribution from multiple expansion) Example 3: Hypergrowth A very simple example Starting EPS: $0.50 per share Ending EPS: $5 per share (25% EPS growth rate) Starting price: $10 per share (P/E of 20) Ending price: $100 per share (P/E of 20) (0% contribution) Key Characteristics of 10-bagger potential stocks Low Price (Ideally target companies with a P/E multiple less than 10) Operating leverage (Should be able to grow earnings faster than revenue) Turnarounds (Flipping from unprofitable or breakeven to profitable can lead to large earnings growth AND multiple expansion)  Microcaps and Nano caps (Smaller companies are more likely to benefit because they may be more overlooked) Growth is critical to a 10-year ten bagger Summary:  My preferred method of identifying potential 10-bagger stocks is to seek Davis Double Play type investments. I want cheap stocks with the potential to become overvalued. In order for an investment to become a 10-bagger and earn 10x your money in 10 years it needs to have certain traits: Low price, operating leverage, turnaround situation, overlooked company, and earnings growth. References Focused Compounding Note on Davis Double Play