In this special edition of What’s Up with Stonks, let’s talk about where to find stocks that are multibaggers. The good news is that they can be found all over the world, in all kinds of economic sectors and industries. The bad news is that finding them is like looking for a needle in a haystack and yesterday's super-winners rarely continue the same winning run tomorrow.
Where to find +1000% returns?
Where can you find the stocks that return +1000% or more? On the Inderes investment forum, user “Jaska10” tipped me off to a recent research paper that covers the topic in mere 300 pages. The study was published by Jenga Investment Partners, a recent London-based investment boutique. The report presents observations of stocks that returned at least 1000% over ten years, or an average of 27% per year. On average, stocks go up about 10% a year if that, so this set is quite a concentration of excess returns.
You can order the report to your email for free here. However, let’s go through the main findings of the report below.
There is literature and research on the subject, but it is often limited to Western companies. Instead, this research paper looked at stocks on a global scale. The study period was May 31, 2012 - May 31, 2022. The timeframe was extended to May, because at the end of 2021, when the bubble was at its peak, there were quite a few more stocks that had more than multiplied tenfold. Companies with a market capitalization of less than $550 million at the end of the period have been excluded from the survey. Therefore, companies like Incap can't be found in the research material. I understand that the survey also only includes companies that were listed in 2012. That is why, for example, Qt Group is not found there.
There are 33 companies from the Nordic countries, including no less than 20 from innovative Sweden. Sweden was the fifth richest country in terms of multiplying shares. Although its GDP is one-sixth of Germany's, Sweden has more listed shares. The Swedish winners include technology companies HMS Network and Vitec Software. Among industrial serial acquirers, Addtech and Lagercrantz Group returned +1000%.
In total, there were 446 shares that returned more than +1000% on these criteria during this period, with the stock universe consisting of more than 50,000 stocks. So about 0.8% of all shares were mega-winners. This illustrates well how difficult it is to find such monster returns for a portfolio.
The aim of the study is to highlight these winners and see what they have in common. There are also many case examples in the study, but I will focus here on highlighting the most instructive examples and findings that can be generalized.
One interesting observation is that a global perspective is important when looking for such monster winners. Of the winner stocks, 13% came from the US and the same amount from Europe.
India accounted for as much as 20% of the winners, almost 100 companies. Slow-growth Japan accounted for 10% of all companies, but fast-growth China accounted for less than 10%. Overall, Asia accounted for 59% of the winning shares in the survey, illustrating the growing importance of this huge geographical region in the global economy.
While the US is often talked about as a market for top companies, investors should keep their eyes open around the world.
This was a surprise, at least to me, but many of the winning stocks were not only from the software or health technology sectors, which accounted for 35% of the companies, but also included traditional industrial companies. In fact, the winning stocks included stocks from all sectors of the economy, from K-pop publishers to Norwegian salmon farmers. There is also a lot of cyclical businesses. The banking sector and the energy sector didn’t shine, but the study period was rather more difficult for them.
Less surprisingly, the size of the winning shares is often inherently small. It's common sense that a company with a market capitalization of 100 billion has a hard time growing to 1,000 billion, while a company with a market capitalization of less than 100 million theoretically has more potential to grow with the help of the limited global economy. 63% of the winning shares had an initial market value of less than $50 million. Only 7 companies out of those 400+ had a market capitalization of more than 10 billion in 2012. If you want tenfolders in your portfolio, you should avoid big companies as a matter of principle.
Many growth companies in recent years have been or are still loss-making because of front-loaded growth investments. An interesting observation in the research paper is that in fact 82% of the winning stocks were already profitable companies in 2012. In other words, an investor doesn’t necessarily have to buy a loss-making early speculative lottery ticket to strike gold. Tesla, for example, is an example of a company that started out loss-making but later turned profitable. The hydrogen company PLUG, also familiar to the investment community, is a rare example of a company that has never been profitable.
For most winners, profitability improved over the study period. In 2012, 17% of companies had an operating profit margin above 20%, but in 2021 as many as half of the companies had profitability above 20%. The study measured profitability by operating profit margin rather than return on capital, which might be more descriptive.
74% of companies increased their profitability faster than their revenue. This is where Finnish pride Neste is a great example. Neste was a modest oil refiner in the early 2010s, but successful investments in renewable fuels paid off handsomely and the company's profitability in terms of EBIT margin increased sevenfold from a couple of percent to 14%. Although, over the same period, the company's revenue has fluctuated around the same 12-18 billion range. Neste's earnings growth has been driven almost exclusively by a strong improvement in profitability. This graph shows both Neste's revenue, with the projections for the coming years in the faint line and the company's EBIT in blue. These turnaround companies are real goldmines, if only you can find them in time.
Of the 446 winner shares, 28% grew their revenue by more than 20% per year on average over a 10-year period. This is a good illustration of how rare it is for revenue to grow by more than 20% in the longer term. Investors should therefore be skeptical about predictions of sustained revenue growth of more than 20% for years to come.
Let's look at the valuation levels of the winner shares. Many investors nowadays think that you can pay high multiples for winner shares. That's how it works in theory if you can predict profitable growth of companies far into the future, but +1000% winners are hard to find in a world of high valuation multiples. 50% of the shares had an EV/Revenue of less than one and, on the other hand, the EV/EBIT ratio was also less than 10 for a similar number of shares. There were only 37 winners among stocks that traded at more than 30 times EV/EBIT during this period. If you want to pay a lot for a company, the odds of monster returns seem to disappear before your eyes, as you can see from this table.
It’s worth mentioning that only 31% of companies saw their earnings grow faster than the 27% annual return on the stock, so indeed, monster returns come from the stretching of valuation multiples. For 72% of companies, the EV/EBIT multiple inflated over 10 years.
The research paper offered some interesting insights into what types of winners the stock market can be. The problem is that applying this to an investor's day-to-day practice is tricky.
First, if you look at the previous 10-year winners from 2002 to 2012, only 23 of them fit into the 446 winners from 2012 to 2022. The past is no guarantee of the future. Many of the current winners have seen their valuation multiples stretch and their size swell, indicating that it won’t be easy for them to continue to perform as well in the future. Thus, it’s unlikely that the winners of the next 10 years will be found mainly in this list of 446 companies.
An investor falling in love with a winner can be detrimental. Whenever there is hype about multiplied winner shares, it should be remembered that a large proportion of listed companies are the worst kind of flatliners in the stock market. Moreover, every company eventually goes bankrupt or is bought out of the stock market.
The quantitative approach also fails to find all stocks. If a screener had been done in 2012 to look for cheap stocks and on top of that, you could’ve correctly predicted strong earnings growth, only 50% of these winners would have been found. However, just adding a few of these winners to your portfolio will do wonders for your annual returns, so you don't have to hit all the winners.
Between 2012 and 2022, we experienced one of the strongest boom markets in history. The forward-looking P/E ratio of the global stock market index rose from just under 11 to just over 15, or 40%. In other words, on average, the valuation levels of all stocks have risen over this period and the environment has been unusually benign for such mega-winners. In the more difficult period 2002-2012, there were only 300 such winners.
Of course, one weakness of a winning stock is the investor themself. The average holding period for shares has plummeted from 8 years in the 1960s to 5.5 months today. In turn, the victory march of winner stocks lasts for years, and investors often must wait years for other investors to catch on to the company's turnaround. I have personal experience of this too. I first owned Revenio Group shares in 2011, but due to impatience and panic, I have often let go of the shares. The shares in my current portfolio have been bought since 2016. The returns have been in the hundreds of percent, sure, but not the 4000% they might have been if I had just sat moderately on the position that I bought in 2011.
Summa summarum, finding the winning shares is like finding a needle in a haystack and hodling them is even harder, but fortunately they can be found in all industries around the world.
That’s all folks! Read analysis and make stock picks that return +1000%!