Tenbagger Stocks: What They Are and How to Discover Them

What Is a Tenbagger?

A tenbagger stock increases in value ten times from its original purchase price, offering investors huge potential gains. The term was coined by investor Peter Lynch, who identified many tenbaggers while managing the Fidelity Magellan Fund. Achieving a tenbagger can lead to significant financial growth, but finding these stocks requires careful analysis. Key factors for spotting potential tenbaggers include strong industry growth, innovative technologies, and favorable market trends.

Insights into Tenbagger Stocks

Peter Lynch identified and invested in numerous tenbaggers when he was the manager of the Fidelity Magellan Fund from 1977 to 1990. As a result, the Magellan Fund grew from $18 million in assets when Lynch took it over to $14 billion when he left in 1990. Over this period, Lynch achieved a 29.2% average annual rate of return, which meant that $1,000 invested when Lynch started managing the fund in 1977 would have grown to $28,000 by the time he left it in 1990.

Lynch liked stocks with a price-to-earnings (PE) ratio lower than the industry average and below their five-year average. He also looked for stocks where the five-year growth rate in operating earnings per share (EPS) was high but below 50%. His reasoning was that such earnings growth rates were not only unsustainable, but companies growing at this pace would attract competition.

In a PBS interview in 1996, Lynch cited Wal-Mart as an example of a tenbagger that investors had plenty of time to buy. He said that investors who had purchased Wal-Mart 10 years after it went public in 1970 would have still made 30 times their money.

 Identifying Potential Tenbagger Opportunities

To find the next tenbagger, investors should consider these situations:

1. Novel technology: Technology drives the stock market. Early investors in top tech companies have earned significant returns. However, not all types of technology fit the bill. Investment-worthy technology needs to have a huge potential user base, be easily adaptable by the masses, and be something that people use.
2. Societal mega-trends: Tracking societal megatrends is crucial for many tenbagger stocks. As more people adopt new technology, its importance to investors grows.
3. Sovereign action: Sovereign or government action can have a huge effect on stock prices. Regulations and new laws can create and destroy markets and even trends. It is critical that a potential tenbagger be supported by, or at least not be impeded by, government regulations.
4. New products: Just like new technologies, companies with new products that fit into megatrends have a strong chance to become tenbaggers. Look for novel products that fill a need created by companies with the ability to produce and market.
5. Investor interest: Many people seem to think it's best to locate stocks that no one else knows about. While finding a quality hidden gem is possible, it's not a reliable indicator of potential tenbagger performance.

Although tenbaggers are an attractive goal for investors to chase, perhaps the most important pieces of advice Peter Lynch has given to investors is to invest in what you know, invest for the long run, and do your homework. If you can do that consistently, you still may not land a tenbagger, but you'll be better off than most.

The Bottom Line

A tenbagger is an investment that grows ten times its original price, a term popularized by Peter Lynch. Potential tenbaggers typically have strong earnings growth, trade at reasonable valuations, and operate in expanding industries. Lynch looked for stocks with low P/E ratios and solid earnings growth, emphasizing investing in what you understand, doing thorough research, and keeping a long-term perspective. While achieving a tenbagger is exceptional, consistently applying these principles can lead to successful investments even if a tenfold gain isn’t reached.