A recent exploration of the traits that define high-performing stocks has unveiled valuable insights for investors seeking to enhance their portfolios. Following Christopher W. Mayer’s influential 2018 book, “100 Baggers: Stocks That Return 100-To-1 and How To Find Them,” Anna Yartseva has revisited the concept of “multibaggers,” stocks that yield significant returns over time.
The term “multibagger,” likened to baseball terminology, highlights the essential nature of these investments—just a few standout stocks can significantly bolster a portfolio’s long-term performance. Yet, discovering these high-fliers requires patience and a keen eye for quality, profitability, and valuation.
Notably, historical data reveals a surprising reality about stock investing. A study by Hendrik Bessembinder shows that over 51% of U.S. stocks exhibited negative returns from 1926 to 2023. This raises the question: how can the stock market sustain an impressive long-term annualized return of nearly 10% despite a majority of stocks losing value? The answer lies in the exceptional outperformance of select stocks. When examining a hypothetical portfolio composed of two stocks—one gaining 9.8% annually and the other declining by the same percentage—it appears that performance would stagnate. However, due to the power of compounding, the growth of the winning stock outweighs the loss, demonstrating the potential for a profitable investment strategy centered around a few successful companies.
Michael Mauboussin, in his work “More Than You Know,” emphasizes that while the frequency of successful trades is paramount, the magnitude of those successes is what truly drives investment performance. This echoes insights from Berkshire Hathaway’s Warren Buffett, who has achieved considerable success through a limited number of high-performing stocks. Though Buffett’s investment journey began with undervalued, low-quality companies—often described as “cigar butts”—it evolved toward a focus on acquiring high-quality businesses for the long haul.
Yartseva’s recent study extends Mayer’s findings by analyzing market data from 2009 to 2023, shortly after the global financial crisis. Over this period, 537 companies emerged as ten-baggers, each achieving a remarkable 900% increase in stock price. The study indicates that these stocks posted an annualized average return of 21.4%, surpassing the S&P 500’s 11.7%.
Diverse sector representation was observed among the ten-baggers, with technology leading the pack, followed closely by industrials and consumer discretionary sectors. Interestingly, while the median annual revenue growth rate for these multibaggers stood at 11.1%, their earnings per share grew at a higher rate of 20%. This data defies the common belief that only companies with exceedingly high growth rates can drive exceptional stock performance.
The study further reveals that while smaller companies may yield higher returns, recent trends led by mega-cap technology firms challenge this notion. Profitability emerged as a crucial indicator of future returns, highlighting the need for companies to maintain a high return on assets. Conversely, over-optimistic corporate spending, indicated by asset growth exceeding earnings before interest, taxes, depreciation, and amortization (EBITDA) growth, could negatively impact returns.
Through this exploration, it is clear that investing strategies emphasizing high-quality, profitable companies at reasonable prices are aligned with historic principles championed by Buffett and Munger. However, timing becomes vital; Yartseva noted that multibaggers often face significant price declines, and the ideal buying opportunity is typically when stocks approach their 52-week lows.
For investors who prefer not to pick individual securities, diversified options, such as the Avantis U.S. Equity ETF (AVUS), offer a pathway to capture the potential of multibaggers while maintaining a balanced portfolio. This ETF adopts an investment process focused on valuation and profitability, providing a cost-effective alternative with a track record of outperforming benchmarks.
Ultimately, this comprehensive analysis underscores the desire for growth-oriented investments while highlighting the importance of patience and strategy in navigating the complexities of the stock market. As noted, identifying quality stocks that will endure and flourish over time remains an ongoing challenge for investors, yet the rewards for those who succeed can be substantial.
