If you’re feeling a bit regretful about missing out on Nvidia’s incredible rise, don’t worry—there are plenty of other opportunities out there. Nvidia’s impressive 2,000% surge over the past five years might seem like a rare phenomenon, but history shows there are many more stocks capable of delivering such spectacular returns. These stocks, known as multi-baggers, can multiply their original value several times over. If you’re eager to find the next big winner, you’re in luck. Jenga Investment Partners have done extensive research, analyzing a decade of data from 2012 to uncover what makes a stock a top performer. Here are six key insights they discovered from studying 446 stocks that gained over 1,000% in that period.
Firstly, rapid growth isn’t always necessary for exceptional stock performance. Surprisingly, about 72% of these top companies experienced less than 20% annual revenue growth over ten years. Conventional wisdom might suggest that faster growth rates are essential for big success, but many of these companies proved otherwise. Secondly, profitability plays a crucial role. Contrary to the belief that only unprofitable, fast-growing companies can excel globally, 367 out of the 446 companies were already operationally profitable in 2012. Margin expansion, where companies earn more than they spend, was vital for their success. Nearly half of these companies had an earnings before interest and taxes margin of 10% in 2012, which increased to 85% by 2021.
Another key insight is the importance of valuation inflation. While buying a great company at a low multiple is ideal, many top-performing stocks started with high valuations. Most of these companies saw their enterprise-value-to-revenue (EV/R) and enterprise-value-to-EBIT (EV/EBIT) multiples increase significantly over time. However, relying solely on valuation inflation can be risky, especially in hot markets. Small-cap companies also have a significant advantage. It’s much easier for a small company to grow rapidly than for a large one. A notable 63% of the big winners were nano caps, even though they made up just 46.5% of the market in 2012.
Geographical diversity is another factor to consider. Some of the best-performing stocks came from countries like India, Japan, Sweden, Germany, and Israel. For example, tiny Sweden had 20 companies with returns over 1,000%, even though its stock market is much smaller than China’s. This highlights the importance of looking beyond traditional markets for investment opportunities. Finally, certain sectors like technology, healthcare, and materials have consistently outperformed others like energy, utilities, and real estate.
While past performance may not always predict future success, there are valuable lessons to be learned from these high-flyers. First, don’t overlook Asia. Despite representing just 10% of global mutual fund portfolios, Asia produced 59% of the global outperformers over the past decade. Second, be cautious with thematic investing. While themes can help identify potential winners, it’s crucial not to ignore the fundamentals. Third, maintain an open mind. Great investments can come from unexpected places, and sticking only to well-known sectors might cause you to miss out on significant opportunities. Fourth, patience is key. Long-term investing generally yields better results than short-term trading. Lastly, always seek new opportunities. Only a few companies remain top performers for decades, so continuously explore fresh sectors, innovative business models, and new market leaders.
In essence, finding the next Nvidia involves looking beyond conventional wisdom, exploring diverse markets and sectors, and maintaining a long-term, patient investment approach. By applying these lessons, investors can uncover hidden gems and potentially achieve outstanding returns.
