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If someone’s goal is to increase their capital in the stock market tenfold, there are certain things to look for in a business, says Edward Sheldon.
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Edward Sheldon, CFA
Based in London, Edward is a CFA-qualified investment analyst/writer who has clients all over the world. Before launching his own investment writing business in 2017, he spent 15 years working in private wealth management and institutional asset management.Edward takes an active approach to investing, managing his own individual stock portfolio. He likes to invest in high-quality companies that are poised to benefit from powerful long-term trends, and capable of generating market-beating returns. You can find more of his views, along with his portfolio holdings, at topshelfinvestments.substack.com
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Finding ‘10-baggers’ (stocks that multiply one’s investment tenfold) in the stock market is a goal shared by many investors. With these stocks, one could turn a £5k investment into £50k.
The good news is that landing these stocks is a very achievable goal. Here, I’ll explain what to look for. I’ll also highlight a UK stock that I think has the potential to be a 10-bagger in the future.
What to look for
If someone’s goal is to find a stock that can increase by this amount, there are several things to look for in a company.
The first thing is a strong ‘economic moat’. Ultimately, the business needs to be offering a product or service that other companies can’t easily replicate. This will help it protect its revenues and profits.
A good example here is London Stock Exchange Group. Had one bought this stock in 2011, it would have been a 10-bagger.
Next, look for a company with considerable growth potential. For a stock to jump tenfold, the chances are the company itself will have to experience substantial growth. It could help here to look for highly scalable companies. These can often be found in the Technology sector.
It could also help to look at smaller companies. Generally speaking, it’s much easier for a smaller company to grow substantially than it is for a larger one.
A great example here is dotDigital. It’s a small UK software business. Had one invested here in 2011, they would have generated returns of 10 times.
Another factor that can help identify 10-baggers is return on capital employed (ROCE). This is a key measure of profitability. And it can provide clues into a company’s ability to compound its profits and grow bigger. For example, a company with a ROCE of 25 is going to grow much faster than a business with a ROCE of 7.
An example of a company with a high ROCE is InterContinental Hotels. Over the long term, it has generated strong returns.
Leadership is another factor to consider. Often, companies that are 10-baggers have visionary leaders. In many cases, they’re founder-led. Examples here include Elon Musk at Tesla and Jensen Huang at Nvidia.
Finally, it’s worth paying attention to valuation. If one pays an excessive valuation for a stock, it will be harder to generate 10x returns.
My stock idea
As for my 10-bagger idea, it’s Cerillion (LSE: CER). It’s a small UK technology company that specialises in back-office software.
This company meets just about all the criteria I mentioned above. For starters, it’s a small company with a market cap of just £470m.
Secondly, as a software company, it’s very scalable. Over the last five years, revenue has risen 125%. It’s also very profitable. Over this period, ROCE has averaged 26%.
Third, it has strong competitive advantages. For example, it has industry-leading products that have been recognised by Gartner.
Finally, it has top leadership. CEO Louis Hall is the founder of the company, having led the management buyout of the original business in 1999.
One negative here is that the stock is a little expensive right now. Currently, the P/E ratio is about 30. This valuation could act as a hindrance in the pursuit of 10 times returns.
Overall though, I think this company has what it takes to be a 10-bagger in the long run.
