In my last two columns, I talked about mastering the art of intelligent speculation.
One method is exemplified by The Oxford Communiqué‘s Ten-Baggers of Tomorrow Portfolio, a select group of speculative stocks with the potential to rise tenfold or more.
Here are six characteristics that we’ve found ten-baggers typically have in common…
- They are tremendous innovators. Companies that rise tenfold or more offer revolutionary technologies, new medical devices, blockbuster drugs, and other state-of-the-art products and services. Over the last couple decades, for instance, investors have been stunned by the moves up in Tesla (Nasdaq: TSLA) with its electric cars, Apple (Nasdaq: AAPL) with its cutting-edge electronics, and Amazon (Nasdaq: AMZN) with its breakthrough e-commerce platform and one-click ordering system.
- They experience terrific sales growth. Notice I said sales growth, not profit growth. A lot of the best-performing companies were not profitable in the early stages of their run-ups. But even if they were losing money, they usually experienced top-line growth of 30% or more, at least initially.
- They protect their margins. Huge sales numbers attract competition the way honey attracts bears. That means a firm has to be able to protect its innovation with patents, brands and trademarks. Otherwise, competitors will flock to the industry, grab market share and force down margins.
- They beat consensus estimates. Profit growth is what drives share prices higher. But in the short term it’s all about beating expectations. Even if a company loses money, if the loss is smaller than expected it can register as a significant beat.
- They are small cap to midcap companies. The best-performing stocks of the last few decades started out as small companies. And over the last century small caps have outperformed large caps by more than 20% annually. Huge companies simply can’t grow at the breakneck pace of smaller ones.
- They are relatively unknown. The less people understand what a company is doing – and the less media attention and Wall Street coverage it gets – the better the chances are that its shares are mispriced. Hot stocks with splashy stories have not been the best performers historically. By the time a company becomes widely known, much of its parabolic move upward may well be over.
Our Ten-Baggers of Tomorrow recommendations are qualitatively different from the other companies we recommend. They are smaller, sometimes unprofitable and almost always more volatile.
This requires us to use a different sell discipline.
We don’t use our customary 25% trailing stop with the Ten-Baggers of Tomorrow Portfolio.
Instead, a sell recommendation is triggered if a company misses the quarterly consensus estimate by 25% or more – or if we believe the company’s business prospects have changed for the worse in some fundamental way.
These stocks are meant to be held longer term. They will bounce around more than most. (In technical terms, they have higher betas.)
Our exit strategy is ultimately based not on share price fluctuations but on how the company’s top and bottom lines compare with expectations.
How has this strategy worked in practice?
Very well. Some of the companies we’ve recommended – like Kite Pharma, MyoKardia and Proofpoint – were bought out at enormous premiums.
Others have already more than doubled.
Still others are only beginning their trek higher.
In short, intelligent speculation is not a contradiction in terms.
You can enjoy higher-than-average returns without taking on a boatload of risk.
Our Ten-Baggers of Tomorrow strategy is a good way to do it.
P.S. On Wednesday, August 16, at 7 p.m. ET, I’m joining Rich Checkan and Adrian Day for an exclusive live webinar. You can register for it here for free.