Stock investors are constantly looking for the next multibagger, a stock that appreciates multifold.
Needless to say, having just a single multibagger in your portfolio can heavily increase your overall returns. But how do we find the next blockbuster stock that has the potential to appreciate in this way?
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Here are three company characteristics that might help lead us to such investments.
No. 1: Growing addressable market
Looking for companies that operate in an industry with a fast-expanding addressable market is a good place to start.
For instance, gene sequencing has been growing at a tremendous pace. The sequencing consumables market has grown from just US$48 million in 2008 to US$1.8 billion in 2018, which translates to a 43% compounded annual growth rate.
If you are familiar with the gene sequencing industry, you might know that Illumina is the dominant player in this space. Illumina has ridden the tailwinds of the industry, with revenue increasing 19% annually.
It is no surprise to see Illumina’s stock has risen more than 660% in the last 10 years, handsomely beating the broader market.
No. 2: Innovative leaders
Investors often get caught up with the numbers behind a company, but the team of people behind the company can be equally important.
A company with an innovative, capable, and honest leader can prove to be a big winner.
One great example is Netflix chief executive officer Reed Hastings. Netflix began as an online DVD rental business. However, Hastings pivoted the company into a subscription streaming site.
In 2013, Netflix took the next big step by producing its first original television series. This enabled Netflix to keep its own intellectual property and create its own unique value proposition. Hastings knew that the major content providers such as Disney would soon build their own streaming services, and Netflix needed original content to keep its subscribers returning for more.
While Netflix is still not yet cash-flow positive, its revenue growth and increasing subscriber count have propelled the stock by a staggering 4,900% in 10 years.
No. 3: Growing recurring revenue
Lastly, it is important that the company has a recurring revenue stream rather than relying on a few large contracts that may not recur in the future.
Software as a service (SaaS) companies are great examples of businesses with predictable revenue streams.
These companies charge either a monthly or annual fee to customers for using their software. Many of these SaaS companies tend to have a high retention rate and a growing customer base.
Salesforce is a great example of a company with recurring income that has been growing its customer base over the years. In just 10 years, Salesforce shares have grown by 1,400%.
The Foolish bottom line
While there is no hard and fast rule to finding multibaggers in the stock market, screening for companies with these three traits could be an excellent place to start. By identifying companies that tick the most boxes, we give ourselves the best chance of finding the next blockbuster stock that will propel our portfolio returns to the next level.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia owns Shares of Illumina, Inc. The Motley Fool Singapore recommends Illumina, Inc and Salesforce.