What To Look For In A Ten Bagger

Our financial newsletter – HX Trader – is about trading.

We're focused on identifying high-probability bets where you can make between 5% and 20% within a few weeks to a few months.

But in our financial newsletter – HX Legacy -  I aim to make big returns in the neighborhood of three to 10 times your money.

To do that, you have to understand that you aren't going to have the same kind of hit rate as we do in HX Trader. In fact, very few stocks ever see those kinds of returns.

It also never happens in just a few months. Most often, it takes several years if not decades for a stock to rise 1,000%.

The thing about these kinds of returns is that even one of them can have a huge impact on your portfolio.

Not too long ago I came across a great thread on Twitter where investor and author Brian Feroldi went through some common characteristics of the multi-baggers he has owned across his career.

I encourage you to read the thread for yourself, and today I'm going to share some comments on it – where I agree and where I differ from what he looks for…

1. A Massive Opportunity

Simply put, we want to find companies where we think they have an opportunity to grow revenues and profits massively.

This is simple math... If you are addressing a small market – say, running bookstores – then you might have a great company, but even you maximize your success, your upside potential is capped.

Instead, Amazon (AMZN) decided to address a larger opportunity: selling basically everything to basically everyone.

The result, as we know, is a stock that has risen nearly 140,000% since going public in 1997... enough to turn every $1,000 into nearly $1.4 million. I'd say that's life-changing money for most people.

2. Consumer-Facing

One aspect of many of the best-performing stocks in the world – in addition to Amazon, think of iPhone maker Apple (AAPL), software company Microsoft (MSFT), and Google parent company Alphabet (GOOGL) – is that they're consumer-facing.

This also ts well with our idea of a total addressable market. If you're operating a business-to-business company, you can only sell to the companies that need your product. That could be big money, but your potential audience is a few million customers at most.

But if you're selling directly to consumers – depending on your business model – you might have the opportunity to market to everybody on Earth. I often use online dating company Match Group (MTCH) as an example for this. Outside of married people and children, Match's addressable market is every person in the world who's looking for a mate.

Now, this doesn't preclude a business-to-business company from turning into a 10-bagger or becoming a trillion-dollar company... But selling to consumers gives you a much bigger market opportunity.

Brian has some other great points in his Twitter thread, and I'd encourage you to read it. But I did want to finish with a couple of graphics inspired by him that are focused on how to trade the opportunities.

The problem most investors have is that they may identify these kinds of ideas, but they almost never hang on long enough to reap the multi-bagger returns.

He notes that for many of these stocks, he often had to survive 50%-plus declines and a lot "noise." Take a look at what we mean...

As longtime readers know, I've preached that if you find a company that is going to grow its earnings per share from $1 to $10, you are going to make a lot of money. It may take years, but if the business can put up that kind of performance, you are positioned to make huge returns.

Now, take a look at the next graphic, which shows how one big winner can more than make up for a lot of small losers...

Let's take a look this with actual numbers of a theoretical portfolio of five stocks that you hold for five years...

On one of them, you lose all your money. Another gets cut in half. One is flat, one is up 30%, and the last one is a 10-bagger.

Your total return is 176%, or 35% a year across five years. That's the power of a 10-bagger.