14 Insights On Achieving 1000% Returns from The Top Out-performers Of The Last Decade
Discover the Strategies and Trends Behind the Most Successful Investments of the Past Decade
In the last decade, there were over 446 stocks that returned 1000% or more all over the globe.
If I asked any investor how many stocks they thought would be 10x in a decade, I think they (along with me) would guess a number much lower than 446!
Dede Eyesan published an incredibly informative study in 2022 which studied these 446 stocks. In it, he describes many specific businesses that fit his criteria and the similarities between them. I went straight to the book he published to learn the lessons he extracted from this study. Now I’m going to share my findings with you!
Let’s get to it!
If you are looking for a multi-bagger in the next decade place a large focus on profitable businesses.
Between 2012-2022 the study showed that 82% of companies that went 10x were profitable in 2012. You can look at this in two different ways:
You can profit greatly by buying unprofitable businesses
You can play the odds and make owning profitable businesses a requirement for your portfolio
I personally like option 2.
As I've discussed before I want businesses which have a high degree of certainty. Part of this certainty comes when I know the business has solved the profitability puzzle. If that puzzle is fuzzy, it's an instant pass.
I'm not smart enough to forecast when an unprofitable business will turn positive.
So I stick with what I think is easier to understand. If you have very specific industry insights and an informational edge, you may be able to play the game of assuming when a business turns profitable. You may also know how long that profitability will last and what kind of growth you’ll see. But as the statistics show, it’s a hard game to play.
Now that we understand how profitability plays into value, let's attack a different angle, price.
The starting price for many of these compounders was surprisingly cheap.
"50% of the outperformers had an EV/Revenue <1x and 49% had an EV/EBIT <10x in 2012." This means that half of these companies were dirt cheap at the beginning of the study. The reason for the metrics like Revenue and EBIT is that they wanted to include unprofitable businesses in their study.
It would have been very interesting to see what the PE ratios were for the profitable cohort of businesses.
The beauty of buying at a great price is that you can leverage the twin engines of growth as outlined by Chris Mayer. This is a simple concept that states that you can get tremendous multi-baggers when you have a mix of earnings and multiple expansions.
When you are only relying on earnings expansion, you limit the upside.
A business can usually increase its earnings at historic rates. However, these rates usually decrease over time via the pressures of capitalism. But when you have a mixture of earnings and multiple expansions, you don’t need to rely exclusively on earnings growth to generate your returns.
Let’s say you have two different investors: Cheap Skate Sam and Earnings Only Earnie.
They both buy a separate business that will grow earnings at 20% each year for the next decade. The only difference is what they pay for it. Cheap Skate Sam pays 10x earnings. Earnings Only Earnie doesn’t care about the price and pays 30x earnings.
Sam ends up with a very nice 33% return on his investment.
Earnie ends up with a (still very respectable) 17.5% return.
This shows you the importance of valuation. When you can buy a business that is likely to grow earnings at a high rate at a cheap price, your returns are magnified.
Now that we know the importance of price, let’s continue discussing earnings growth.
"31% of the 446 companies compounded their earnings by 27% over the 10 yrs. All their 1000% may have come from earning growth alone." - Dede Eyesan
This is insane to me. A business growing at 27% for 10 years can have a constant valuation and still get you a 1,000% return!
I wonder how many MBAs factored in 10 years of 27% returns into their DCA models? Probably "0." High earnings growth for 10 years may enable you to pay a high price and still make great returns.
As the figure regarding Earnie shows, you can still pay optically high prices for a wonderful business growing earnings at a high rate and getting great returns. Will you get a 10x in a decade? No, but I don’t think anyone is scoffing at a 17.5% return for 10 years.
Now that we know the interplay of multiples and earnings growth, what size of a company fits these characteristics?
Smaller companies occupy a massive majority of the 10x club.
Businesses with a 2012 market cap of under $300 million made up 86.6%of these quick 10-baggers. Nano caps, which are stocks under $50 million in the market cap made up 63%.
It makes sense that a large proportion of businesses that made 1000% would be of the smaller variety. After all, all large businesses were once small businesses. The problem with this is that many great businesses stay private longer than before. Then you see them go public at multi-billion dollar valuations, like Airbnb.
So if you are going for large multi-baggers you should mostly skip the large caps (>$10 billion market caps) that made up .07% of the subset group. When businesses get larger, growth and multiple expansion become harder.
Everyone will mention all the large-cap tech stocks like:
But for every one of these names, there’s a truckload of businesses that have been erased due to the savageness of capitalism.
Dede’s 10 Lessons From His Study
Let’s go over the author’s 10 lessons from the study, shall we?
Open-mindedness and flexibility are essential to achieving global outperformance. While certain characteristics, geographies, and industries may be more likely to produce outperformers, great investments can come from anywhere. It is important to note that investment flexibility is not a replacement for proper due diligence, as understanding the business model and key drivers is crucial for success.
Large Asian business demographic. Asia represented 59% of all global outperformers!
Thematic investing can be a good framework for identifying potential outperformers, but it is important to not fixate on themes. While some companies, like Tesla and BYD, have benefited from thematic investing in the rise of sustainable energy, many others with similar stories failed to have any material share price gains. Finding the right theme is just a small part of the investment journey, and identifying undervalued winners with great potential is crucial for success.
Leveraging businesses in new technology. A business at the forefront of being part of the value chain for an exciting end product can be highly valuable. He cites examples like “solar, lithium, and cell-based therapy.”
Resilience. 18% of the businesses he analyzed in the study had declined by over 30%. If you can’t hold onto these stocks, you won’t capture the upside.
Long-term thinking and patience. You need to think in years, not days. Many businesses from the study (36%) started with negative returns for the first 2 years, then outperformed until 2022. He says if you set rules to sell after 2 years of losses you’ll miss out on great opportunities.
Cyclical growth had a large representation. A whopping 47% of the businesses they studied were in cyclical industries like mining, energy, semiconductors, and discretionary retail. Yet they were able to grow through cycles because they “grew their business volumes over the years to compensate for the price bumps.”
Turnarounds can turn around. He didn’t specify how many of the outperformers were turnarounds, but there were a couple. He outlined 3 ways a turnaround can be a successful investment:
• Identifiable and solvable problems
• Measurable indicators to gauge turnaround progress
• High potential for upside (mainly due to negative market sentiment)
Creativity and imagination. Creativity allows investors to see investments from multiple angles, opening up opportunities that can’t be seen by others.
Sustained outperformance is very hard to come by, so diversify your ideas. Of the 446 outperformers they identified from 2012-2022, only 23 of 300 returned 1000% in the previous decade (2002-2012). There are great ideas all around you in different industries and geographies, don’t be afraid to look outside your home market.
All data from Dede’s study is in his book which can be found here.
Throw him a follow on Twitter as well.
I mentioned the “Twin Engines Of Growth,” a concept I learned from Chris Mayer. He has done a 100-bagger study and published his results in his great book which can be purchased here.
What ana article!! Enjoyed it too much, thanks Kyle! Also important the note on the cyclical sectors, if you know whre to research, you can get amazing opportunities.
Great piece! Always worth learning from past ten baggers how to identify future ones.