Learning from a 10-bagger

Learning from a 10-bagger

Posted Aug 30 2009, 11:57 PM
by AllStar Portfolio Rating: Filed under: investing, CAPS

Since I'm sure you're just as tired as I am with blogs about “calling” Sirius (SIRI) at 5 cents, and since I'm equally sure you don't want to hear someone bragging about how great of an investor they are, especially if your portfolio is still down from the recent carnage, let me be clear that you won't find that in this post! (I’ll leave that for when I score my 10th or so 10-bagger, not my first, especially when I have some serious losses to more than help balance my ego).

An investor who wants to be successful (and don't we all!), should spend some time and effort examining the stocks in their portfolio, both the winners and the losers to see what they can learn from the investment. I think investors DO spend a great deal of time considering those stocks that didn't perform as as they had hoped.

They are either angry at themselves, blaming company management, blaming the economy, blaming "Mr. Market" for being foolish or contrary, or blaming their third grade teacher for not doing a better job of teaching them basic math. Rather than blaming anyone, a thorough analysis of what they may have left out would be a better use of their time if they want to avoid similar mistakes.

Less obvious: We should study our winners. This could be equally as beneficial, but I suspect we rarely take this route either. A ten bagger -- a stock that has gone up 10 times its purchase price -- can happen without a great deal of investment skills, especially in the current market.

Pharmaceuticals

Whether it's a ride on a pharmaceutical that gets good news or a stock that Mr. Market has left for dead, 10-baggers can be found, especially in this economy, without having to ride them up for decades.

While being savvy enough, (or lucky enough), to jump on Human Genome Sciences (HGSI) soon after it plummeted to 50 cents on March 11th and riding it up to $20 on August 26th would have been a thrilling ride, and a great “trade”, it’s not quite the investing multi-bagger I’m referring to.

Pharmaceuticals are certainly an area where you might have a chance for a 10+ bagger in quick order. If one trades these, however, they should understand that the losers will outnumber the winners. (The FDA is more fickle than pretty much anything else you can think of, including.....well, I'll let you finish that sentence, I'm not sure if my relatives will read this).

Having held Dendreon (DNDN) for the longer leg up, I can relate that it’s easy to day dream. This might be acceptable if you’re willing to risk a small part of your portfolio, but such trading should not be your plan for an early retirement. Likewise in this market, taking a chance on a stock that Mr. Market priced for bankruptcy in the 60-cent range and riding it up to $8 is another way to “trade” your way into a 10-bagger, (examples being TRW Automotive (TRW), Dollar Thrifty (DTO), Las Vegas Sands (LVS), Tenneco (TEN) and many others).

For me, those would be good trades, but not quite what I consider an investment-grade 10-bagger. For me, it’s the home-grown, getting in when the equity is fair-valued by fundamental standards, and riding it up as it grows in earnings and potential.

This type of 10-bagger use to be more prevalent back in the tech days of the 90’s. In fact it was only a fraction of what EMC (EMC), Dell (DELL), Amazon (AMZN), and other Internet potential stocks achieved. Of course the bubble bursting shows you can ride a 10-bagger back down as fast or faster as you rode it up. You can also grow a 10-bagger over decades such as General Electric (GE) or Wal-Mart (WMT).

My first 10-bagger goes more along the lines of the tech bubble stocks, achieving the 10-bagger status for me in just under a year.



STEC (STEC) spent the eight years of its relatively young history often cycling between $2 and $12. As a designer and manufacturer of computer memory modules, it was at the whim of the tech industry to keep it's product "current" with each new computer technology. Each new memory generation was a source of renewed sales, but a nightmare controlling the inventory on now obsolete parts. Supply and demand controlled the earnings reports.

Enter the year of solid state disk drives. Most disk drive companies had decided that solid state hard drives, made entiredly from memory modules, were too expensive and would not be embraced by the market for several years. In the area of disruptive technology, STEC decided that there would be some cases where data-intensive applications might be make the user willing to pay a premium for speed and reliability, with no moving parts. There were also technical challenges, especially in regard to static memory being subjected to many thousands of writes and erasures.

STEC's share price has gone from $3.55, when I purchased a small stake, to $39.90 on Aug. 28. While development took a great deal of time, STEC did find willing partners to help evaluate the technology. When EMC validated that the technology was sound and the time IS NOW, (in limited quantities and specific applications), the major disk drive vendors were left flat-footed. It can take a year or more for a company to qualify technology. IBM (IBM) , Sun Microsystems (JAVA), Hitachi (HIT), and other storage companies soon certified the STEC drive. Other drive manufacturers are struggling to catch up, but for now, STEC dominates the market.



So what have I learned from my 10-bagger?

•Buy what you know. This old adage tells us that we should have some understanding of what we invest in. It doesn’t mean that we need to be an aeronautics engineer to buy Boeing. It doesn’t mean that we need to be a doctor to buy HGSI. It does mean that we should understand something about the industry. The more the better so we can make intelligent decisions about how wide someone’s moat is, how competition will affect our thesis, how regulation or environment rules might restrict bring a product to market, or how a recession might affect our potential.
•It’s NOT all in the Fundamentals: I still see people shorting STEC. Each month, there is a fresh round of shorts whose only thesis appears to be “too far too fast”, “overvalued”, “P/E over 100”, “bad five-year chart”. Yes, a rapidly growing company can look a little “scary” as the stock price climbs and the P/E looks out of whack. Yes, current P/E does “seem” high, but what about the forward P/E, 18, not bad in the tech field. Quarterly growth was1,269%, not bad in any industry. Toss in market domination, no serious competition, no debt, expanded manufacturing capabilities, and you have a recipe for growth that can’t be measured on past data.
•Ride your winners: This is a lesson that I’m still struggling with as STEC exceeds my target ratio of any individual stock in my portfolio. For some, selling a third or half is a good compromise to lock in gains, especially if one isn’t sure why the stock rose so high, or what the real upside might be. The “ride your winners” may be the hardest thing to do to score that elusive 10-bagger as you will have ample time to talk yourself out of “risking” that new found gain, especially in this type of market. The key is to reevaluate your thesis, why you bought the stock in the first place. If I feel a stock got beaten down too far by Mr. Market and the stock rises back to a new five year high, and then some, all while having earnings that are topped off well below historical highs, then it might be time to sell. Having a hard target to sell without reevaluating can be an easy way to play the stock, but certainly doesn’t give you an opportunity to ride winners that have a fresh outlook. Rebalancing is an issue that investors need to determine based on their own risk/reward.
•Small Cap stocks have the best chance to have rapid returns: Plenty of larger companies have show the way to stellar gains, but it's a little harder to double when you're market cap is $1 Billion than it is when it's $100 Million, and if you want to grow a 10-bagger, it's harder still for big companies. There is nothing wrong with the large companies, giving you steady growth, value, and dividends. Every portfolio should have a good mix. From my reflections, however, I will always have a few small caps in my portfolio. Do expect volitility to be higher, and do plan on reevaluating them more often. Companies with "disruptive technology" and a wide moat can give you the most growth and best chance of holding the growth. These terms are oft used and while some people think disruptive technology can only happen in the tech world, like STEC, there can be disruption, or wide moats in many industries.
• I never buy enough of my winners: No explanation needed here, but the lesson is that we can't get greedy, and we'll never be totally happy, even with 10-baggers! I learned this lesson well with Dendreon, but as a high risk “trade”, I’m not sorry. By the same token, having a plan when you go into a stock, an initial thesis for why you would sell, and your own definition of diversity in your portfolio means that you should be less likely to waste valuable self reflection second guessing yourself! I try hard not to spend my time playing the “if”, “should have, could have” game. Although I do play the “glad I didn’t” game! It would be nice if our biggest problem was when to sell our winners, but yes, we do need to learn from our losers as well, however, I’ll save that for another day.
May all of you learn some lessons from your own 10-bagger investment.

VISIT Allstarportfolio at WallStreetSurvivor.com


BLOG entry by Motley Fool, Allstarportfolio contributor TSIF on Caps.

Allstarportfolio is a collection of investors using community intelligence as one tool for investing. STEC is a holding in the allstarportfolio wallstreetsurvivor portfolio. At the time of this posting, the author is LONG on STEC, and believes it has room to grow. The writer also is also long EMC and GE and has long options in Dell. The writer has no holdings in any other stock referenced in this article, including WDC, STX, DNDN, IBM, DTO, TRW, JAVA, HIT, HGSI, LVS, TEN, or WMT


http://blogs.moneycentral.msn.com/topstocks/archive/2009/08/30/learning-from-our-winners-what-i-learned-from-a-10-bagger.aspx