Ten baggers are elusive but no less sought after. Many private investors would love to claim they’ve had a ten bagger stock, but finding these stocks is hard and holding them for the amount of time required to grow can be even more difficult.
This article will show you what ten baggers look like and how to find them.
What does ten bagger mean?
A ten bagger is a stock that increases in value by 10 times its original purchase price, or an equivalent of at least a 900% gain. The term ten bagger was originally coined by Fidelity fund manager, Peter Lynch, who ran the Magellan fund, in his book ‘One Up On Wall Street’.
Ten baggers are much sought after by the investing community because of their potential for life-changing returns. If you can make ten times your money on a single stock it can pay for a lot of losing stocks.
How does a stock become a ten bagger?
A stock becomes a ten bagger when the share price increases 10x or by at least 900% from the initial investment.
Stocks can become ten baggers due to short term hype, pumps, and through strengthening fundamentals over time.
If you want to find ten-bagger stocks, then you need to find some commonalities.
What ten bagger stocks have in common
Ten-bagger (or 10-bagger) stocks often have similar things in common. Here are several I’ve found:
- High ROCE (Return On Capital Employed)
- Capital-light business model
- Small market capitalisation
- Management ownership
- Long revenue growth runway
Companies that are able to generate high ROCE can see their business rapidly expand and the company’s share price follows.
This is because a business that can generate a 20% return on capital employed in the business can then deploy more capital to grow the company’s business even quicker.
Software and technology companies can often have high ROCE percentages and so these sectors are popular with investors looking for ten-bagger stocks.
Capital-light business model
Capital-light business models can be great sources of potential ten-bagger stocks.
This is because businesses that are able to operate without lots of capital investment can focus on growing the business rather than maintaining it.
For example, miners that require large amounts of machinery will need to spend money maintaining that equipment from wear and tear. Restaurants and bars will need to refurbish outdated concepts and so money is spent on the existing business rather than growing it.
FeverTree outsources its manufacturing and bottling operations and instead focuses on building a brand. This means the business is capital-light and more of the business’s capital is spent on growth capital expenditure (capex) than maintenance capex.
Here is the share price chart of FeverTree from its Initial Public Offering (IPO) to its peak – a 25-bagger at least.
Small market capitalisation
Stocks that are small have a larger potential to ten-bag. This is because ‘elephants don’t gallop’ as fund manager Jim Slater said.
A stock that is £20 million would need to add £180 million in value to become a tenbagger.
But a stock that is £2 billion would need to add another £18 billion in value to become a ten bagger stock.
Management teams that hold large amounts of stock look at the business with an owner’s eye.
This means that they are more likely to act in the interests of shareholders with long term value creation, rather than focusing on taking money out of the business or building an empire for vanity purposes.
Companies with directors that don’t own significant amounts of stock won’t think twice about issuing more equity and diluting existing shareholders if it means the company can acquire a new business and stroke their egos.
I have found that management don’t mind spending shareholder money on acquisitions.
But companies who have their own net worth at stake will only focus on making value accretive deals.
Long term revenue growth runway
Another commonality of ten-bagger stocks is the potential to grow revenue hugely.
Companies that have a large addressable market to sell to are often hallmarks of ten bagger stocks. New technologies can provide plenty of ten-bagger stocks, such as the Microsoft, Alphabet (Google), and Facebook.
New products can also provide an injection of growth into a business. A CEO that brings in a new business division that boosts earnings or grows market share is always worth looking out for.
A company will need to boost its earnings in order to multibag, and any ten-bagger in the stock market needs time in order to grow.
The best stocks are in growing industries; this is where you should look for your next ten-bagger.
However, just because the industry is growing does not guarantee that the stock will become a ten bagger.
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How to find ten bagger stocks
Finding ten bagger stocks is possible if you’re willing to do the work. I have multi bagged many stocks that went on to become ten baggers (sadly after I’d sold them).
To do so you need to do some research and filter.
I use SharePad to do all of my fundamental searching and technical filtering.
You can get a one-month risk free trial worth up to £69 and a free month on me below.
Filter for market capitalisation
The first step to finding a ten bagger stock is to filter the London Stock Exchange for smaller companies.
I have built my own Ten Bagger Filter on SharePad.
You can see here that I’d added a criterion for market capitalisation and I’ve capped this at 100 million.
This shrinks the stocks on the London Stock Exchange to 788 from nearly 2,000.
Stocks in the filter: 788
Filter for director shareholdings
The next step is to add a filter for director shareholdings.
I’ve added this into the filter and applied a minimum of 5% of the share capital to be owned by directors.
You can add more if you wish. But if directors don’t hold significant positions in the equity then that tells me they’re not bothered.
And if they’re not bothered – why should I be?
Stocks in the filter: 409
Filter for ROCE (Return On Capital Employed)
The third criterion to be added is ROCE.
This is because companies that are able to earn high returns on their capital employed can potentially grow quickly if they reinvest that capital into the business for expansion.
By putting 5% ROCE as a minimum this has weeded out another 300+ stocks that do not generate adequate returns on capital to be included in this filter.
Stocks in the filter: 77
Filter for revenue growth
Next, we need to filter for revenue growth. It’s no good if a stock is in a declining industry or seeing declining sales.
Ten bagger stocks are growing their business and by filtering for turnover to be higher than turnover 1 year ago we see businesses that have grown their turnover.
Adding this criterion gets rid of the stocks that are failing to grow their own revenue.
Stocks in the filter: 44
Sift through the results
Once the filter has taken out the trash, it’s time now to do some manual work and dig through the results.
In this example, there are 44 stocks that meet the specific ten bagger criteria.
All of these stocks are <£100 million market cap, have director holdings of at least 5% of equity, ROCE of above 5%, and growing revenue from the previous year.
It’s likely that you won’t know what all of these companies do.
You can click the paper icon at the top, or press Enter on your keyboard, to go to SharePad’s Single Page feature.
Clicking where the company bio is will show the full bio. We can see below there is a full commentary on Journeo’s business model.
I hold Journeo with an average <100p. It could potentially be a ten bagger stock, but like with all early stage businesses there is execution risk.
3 examples of ten bagger stocks
I first bought Creightons in 2016 when the price was around 6p. In 2021, the stock traded above 90p, which would’ve been a 15-bagger if I’d held.
I thought I’d done well when the price got to 12p and sold for 100% profit. I didn’t realise I was holding onto a quality small cap at the time and thought I could achieve better returns elsewhere.
Here’s the chart (all charts taken from SharePad).
AD Dynamics (ABDP)
AB Dynamics was another stock I bought in early 2016 when the stock price was below 300p. This time I sold for a 30% profit!
A few years later the stock nearly hit 3000p, and was another 15-bagger from the lows of 200p.
Future Group (FUTR)
Future Group is another stock that has more than ten-bagged.
When I was buying the stock, everyone had written it off as a publisher that was going out of business.
What nobody else realised was that the business model had changed and Future now had a scalable platform to grow.
I wrote on Twitter that I believed this stock would multibag.
Thankfully, it did. Future was one of my largest winners at the time as I more than four-bagged it. But even then, it still went on to rise from its lows more ten-fold.
React Group (REAT)
As a bonus, here is a stock which I think is a future multibagger. The stock has already bagged since my initial purchase price at 1.6p.
React is a specialist cleaning business and so charges higher margins than typical cleaning jobs. It does the jobs nobody else wants to add that is high value, for example cleaning up suicides on trains, rental problems, guano..
I notice React did not show up on Ten Bagger Filter, but nothing is perfect. If it was then trading and investing would be easy.
I look for early trends in small caps for multibagger stocks.
The legendary fund manager Peter Lynch said that he would often make money in years 3 and 4 of owning the stock. The trick was to not sell out of multibaggers too early – something I have done far too often.
It’s worth noting that PE investors who focus on the price-to-earnings ratio will struggle to hold multibaggers. Many of the biggest market winners of the past decade have come through novel technology and traded on lofty multiples for large periods of time.
Become a better trader with SharePad. Use SharePad’s technique analysis suite and filtering to find ten-bagger stocks. SharePad gives me an advantage over the market and you can take a risk-free trial through me. Find out more