In my experience, the expedited route to uncovering tenbaggers involves strategic investment during a prolonged period of improved interest rates. The key is to evenly diversify investments across approximately ten promising stocks and hold onto them as long as they consistently deliver "strong earnings."
It is crucial to swiftly cut ties with stocks that produce "poor earnings" while adding other potential tenbagger candidates. The current environment, marked by the recent series of interest rate hikes finally coming to an end, signifies the kind of extended period of interest rate improvement conducive to tenbagger discovery.
During a prolonged period of declining interest rates, investment opportunities in long-duration (companies that take a long time to turn a profit or break even) tend to see a rise in valuation. Over the past couple of years, there hasn't been much talk of achieving tenbagger status, largely due to the Federal Reserve aggressively raising interest rates, causing some aggressive growth stocks to decline significantly.
Looking ahead, the more the momentum of the U.S. economy wanes, the louder the calls for "quick rate cuts" will become. In a low-interest-rate environment, valuation uplift is more likely for investments in businesses with stable repeat revenues, such as Software as a Service (SaaS).
When it comes to tenbagger discovery, a recession should not be viewed as an "enemy" but rather as a friend. Observing what the executives are doing, rather than what they are saying, is crucial. Pay special attention to whether they are pleasing investors. The most pleasing aspect for investors is consistent delivery of "strong earnings" in each financial statement.
Therefore, it is imperative to note and remember whether your holdings have indeed delivered "strong earnings." The definition of "strong earnings" includes surpassing pre-consensus forecasts in EPS, revenue, and guidance. If any of these criteria is not met, it qualifies as "poor earnings."
Selecting around ten promising stocks is suggested, although expecting all ten to become tenbaggers is unrealistic. There will inevitably be disappointments in financial statements. At such times, it is essential to calmly cut losses.
Especially in the current situation, where we may be entering a recession, there is an increase in companies that falter in their financial statements due to macroeconomic headwinds. However, it's the handful of stocks that continue to deliver strong earnings amid the market's descent that attract funds from global investors.
In essence, we are entering an era of stock differentiation. Companies consistently delivering "strong earnings" will experience multiple expansions. Multiple expansion refers to an increase in the price-to-earnings ratio (PER). The stock price tends to rise interestingly when the "growth in EPS" is coupled with the "expansion of the multiple" that investors are willing to pay for that EPS.
Investing in exciting and future-forward stories that are still unpredictable is too much like gambling. Stable companies that cannot consistently deliver "strong earnings" are not suitable for tenbagger discovery. However, businesses with repeat revenues, like SaaS, may be more likely to consistently deliver "strong earnings."
Maintaining a holding for a minimum of three or four consecutive "strong earnings" implies holding the stock for about a year or a year and a half. It means inevitably holding the stock across the announcement of financial results. Having three or four consecutive "strong earnings" often becomes a pattern.
Companies that produce "poor earnings" tend to be habitual offenders in disappointing investors with their financial results. Therefore, it is essential to adhere to the practice of holding stocks that consistently deliver "strong earnings" and promptly selling those that produce "poor earnings." Failure to cultivate this habit can lead to a chaotic portfolio.