While there are other methods to earn money in the stock market, the following is a checklist of the characteristics I look for in multi-bagger firms with 5–10x growth potential…
- The firm has a market capitalization of around $100 million.
- The micro-cap or nano-cap area is where huge institutional players can’t join since most of these players can’t invest in anything below $5 per share, and here is where you have an edge over your competitors.
- Even if you are able to identify tiny firms that are doing well before they are covered by analysts and financial institutions, you will be able to generate multi-bagger returns just by outpacing institutional money.
- Current Earnings
- Sales and profitability growth in the double digits are expected.
- Sales and profitability growth have picked up pace in recent quarters.
- Institutional investors are attracted to large and rapidly increasing profits growth.
- Annual Earnings
- Over the previous three years, the company has seen double-digit revenue and profitability growth.
- A return-on-equity (ROE) of at least 17 percent is required.
- It is vital to track annual results since a firm may reduce expenses or adopt other methods to raise earnings for a quarter or two, but these actions may not be sustainable in the long run.
- Institutional Sponsorship
- In recent quarters, there has been an increase in the number of funds that possess the stock.
- Participation in the stock by funds that have beaten the market
- Once again, the aim here is to get institutional funding ahead of schedule.
- Huge total addressable market (TAM)
- The whole addressable market is defined as the existing revenue potential (or total market demand) for a product or service that is already accessible.
- Clean share structure
- Look at the number of shares that are now outstanding, as well as the breakdown of that number.
- What is the degree of concentration of the company’s stock?
- What percentage of the company’s stock is held by management and other funds?
- For example, if the company’s management owns around 70% of the company’s stock, and institutional investors join, demand will outstrip supply by a significant margin, causing the price to go parabolic.
- Good management team
- Perform due diligence on the company’s executive team, including researching each member’s history as well as their previous business judgments.
BONUS POINTS
- In this case, the firm you’re considering is part of an industry in which there is a strong macro tailwind for a bull market to come, thus your individual company wager becomes a sector wager.
- Taking a closer look at anything that has just reached a 52-week or multi-year high might be worth your time.
- The corporation is constructing a moat around itself in order to preserve competitive advantages over its rivals and so secure its long-term earnings and market share in the process.
