The Search For The 10-Bagger Begins

The Search For The 10-Bagger Begins
03/23/06 12:10:21 PM PST
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by Thomas Maskell
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These promising stocks are elusive but not particularly rare.


Ever since Peter Lynch coined the phrase "10-bagger," investors have been searching for these elusive little gems. Defined as stocks that increase in price 10-fold, 10-baggers are elusive but not that rare. In any given year, you can find a few of them. If you lengthen your time horizon to two or three years, you can find hundreds of them. Of course, when I say you can find them, I mean you can find them after the fact. Finding them before the fact -- well, that's why we're here.

DIGGING FOR 10-BAGGERS
In a perfectly rational market, there would be no such thing as a 10-bagger. According to the magicians of manipulation, the market sees all and knows all. All available information is built into the price. Even some information that isn't available is stuffed into that price. So how can there be stocks that rocket from $1 to $10, or $10 to $100 over the course of a couple of months or a couple of years? There are two possible answers.

• First, there are hundreds of companies increasing their sales and profits 10-fold, or
• second, the stock market isn't rational.

A quick look at the fundamentals of most companies leads me to think the second answer is the best bet.

If the market isn't rational, how can a rational investor ever hope to spot an emerging 10-bagger? That's a tough one. But you can answer that question by looking at them to see if they share any traits. To do that, you will need a stock-screening tool like the one found at www.Reuters.com. Screening helps you identify a list of stocks that have risen in price by 100% or more in the past year. These are doubles, and while not all doubles are 10-baggers, all 10-baggers are doubles. So it's a good starting point.

I chose a one-year price increase horizon because that is the longest horizon available at Reuters. If your stock-screening tool identifies price increases spanning longer than one year, you will be able to skip the next step, which is to determine which of these doubles are potential or actual 10-baggers. A 10-bagger usually requires two or three years to mature, but it must at least double in each of three consecutive years. Thus, a one-year price screen only provides a clue to its existence. The screen may be highlighting the beginning, the end, or the middle of its move. You will have to broaden your time horizon to get a clearer picture of which doubles are truly 10-baggers.

To broaden the time horizon and narrow the field, I use www.BigCharts.com, another free service. Big Charts provides stock price charts for the majority of the companies you will uncover in your initial screen. Linked to these charts provided by Big Charts are select technical and fundamental data. Among the technical indicators are volume, the moving average convergence/divergence (MACD), the relative strength index (RSI), money flows, on-balance volume, and so forth. For the fundamentalist, there are rolling earnings per share (EPS), price/earnings ratios, and dividend yields. These are provided for time horizons ranging from one day to 10 years.



NARROWING IT DOWN FURTHER
To give you an example, using the Reuters screening tool, I uncovered 588 stocks that had doubled in the past 52 weeks. How many of those stocks are or will become 10-baggers? Big Charts will help me determine that, but looking through 588 stock charts is a daunting task. You will want to narrow the list by eliminating some stocks before you begin your chart search.

First, it's best to establish some list demographics. This will help you with your elimination criteria. For instance, the total number of stocks listed in the database is 8,915. The date of the screen was March 8, 2006. The 588 stocks featured by the screen are 6.6% of a total market. That is 588 stocks from a market whose major indexes were relatively flat. That is a very significant percentage of the total.

To help shorten the list, two descriptors may provide candidates for elimination: industry and trade exchange. The list doesn't show any industry preference. There are 79 different industries represented on the list. Since there are 190 industries in the database, it means that 6.6% of the stocks represent 42% of the industries. They are a very diverse group and span both low- and high-tech industries.

The list does indicate a significant concentration with respect to the exchanges. The OTC and NASDAQ have the lion's share of the doubles. Together, they account for more than 84% of the companies listed. By itself, the OTC represents 54% of those listed. The American Stock Exchange is better represented than the New York Stock Exchange, but neither achieves double-digit status.

There are a few more interesting demographics. For instance, the launch price of these doubles range from zero dollars per share (stocks priced below $0.01 are listed as zero) to $194.53 a share with a median beginning share price of $0.82. Another interesting observation is the degree to which these stocks increased in price. More than 100 of them were five-baggers within the 52-week time frame, with 57 of those stocks becoming 10-baggers within the year. The beginning price of these high-flyers ranged between $0.00 and $6.15 with a median launch price of $0.01.



The screen also provides some fundamental demographics. Most long-term investors would certainly argue that growth in a company's operational performance would be reflected in the growth of its stock's performance. A quick perusal of our list gives 10-bag hunters reason to doubt that. Of those stocks, 32% had a declining EPS during the year. Equally intriguing, 83% of them had three-year annual EPS growth rates that were listed as "NA" -- an indication that usually means these are newly listed companies. We will have to dig deeper to confirm that.

The sales growth is equally baffling. Of these companies, 25% had negative trailing 12-month growth rates. This statistic carried over to the three-year annual sales growth rate, with 27% being negative. EPS and sales growth are apparently not magic indicators. Fundamentalists, take note!

In stock analysis, a picture is worth a thousand words -- or, in this case, a thousand entries on a spreadsheet. But I'm not interested in blindly clicking through 588 stock charts on a computer screen. I need to narrow this list to something more meaningful. My first elimination criterion will be as practical as it is logical. The first stocks I will eliminate are those that won't make me any money. After all, that is the purpose of this search.

To make this first elimination, some simple math is in order. If we assume a 10-bagger and a trading cost of $25 per thousand shares, it is reasonable to eliminate any stock with a beginning price of $0.01 or less. The logic is simple. The cost to get into and out of the stock would be $0.05 a share. Add to that the cost of the stock and subtract it from the final price ($0.10 - ($0.05+$0.01) = $0.04), and your 10-bagger has turned into a four-bagger. Not bad, but not worth the risk. With this one calculation, we have eliminated 136 stocks -- 23% of the total.

You can use any elimination criterion that makes sense to you or reflects your risk profile. For instance, if you are like me and find the OTC to be somewhat untrustworthy, dropping OTC stocks from the list will eliminate 54% of the candidates. Other possible elimination criteria are industries (you may not like some), shares outstanding (drop the biggest numbers), or sectors (eschew the "old economy").



The key here is to eliminate based on criteria that are not causal. The search for a 10-bagger is a search for cause (and support) and effect. The effect is a 10-fold increase in price. The cause (and support) is the performance of the company or the madness of mobs or the manipulation of markets. Our hope in this venture is to determine why these stocks launched -- performance, madness, or manipulation? Keeping this in mind, it is unlikely that the exchange caused the price increase. In addition, given that more than 79 industries are represented in the list, industry is also an unlikely causal indicator. Other noncausal indicators include sectors and shares outstanding.

What I am going to do is eliminate all stocks with current prices below $0.10, all OTC stocks and all American depositary receipts. This will leave a total of 254 stocks in 55 different industries and listed on the three major exchanges (Figure 1). Now I have a list that is small enough to begin charting with.

Not only is the list smaller, but its character is different. For instance, only 24% of these stocks had trailing 12-month (TTM) EPS declines (versus 32% for the original 588). Sales growth was even more dramatic, with only 9.8% showing TTM negative rates (versus 25%). However, it is clear by the screens and the subsequent eliminations that the market is willing to bid up the price of stocks with declining fundamentals. What do they see that we don't? Maybe the charts will tell us.

Next time, I'll look more closely at the charts. However, if you want a head start, you can peruse the 254 charts listed in Figure 1 at your leisure. I start with a five-year weekly chart with volume, P/E, and rolling EPS indicators. Focus on the period just before the stock makes its move. Remember that you are seeking cause and support. What caused the stock to move? And what kept it moving?



HOMS QDEL IVAC MCU TFSM
AQQ BABY LUFK ANX AQNT
BFT ZVXI JOYG AVM ATRO
PKS SCHK JLG MTXX LMIA
NFLX SPNC JCTCF HITK CRDN
MIND TIE IIIN CBRX AMR
UHAL CUP IPII ALKS AAI
MAIN DXPE RMIX MNTA NICH
LUB FLS USG ASGN GIL
DBRN IIN ORA ESCL GIII
GES ABIX STRL ARP LKQX
URGI GHM MVCO AIX RUM
PETS BLD FWLT TGIS LBIX
OATS FLOW WVVI ASF HANS
GAP CMCO LMS ADST NUVO
FC CECE DESC FTK RGEN
ILMN ERS PLXS RTK CELG
OYOG ARS ELTK BBC ABAX
BRLC BGC XWG SIRF PDLI
AXTI BOOM MFLX RBAK LIFC
ESLR WIRE PWEI RWC NVAX
NMGC BXL CMT CELL POZN
BTUI HOM NWD STXN ABGX
TRID ACLI MED GLW REGN
ANAD AIRM ICON CIEN ALNY
ASYT MDM AUY OPTC GNBT
RMBS GGR SA BKHM ADLR
CVV GMXR TRE ITRI VRTX
BRCM TGC GRS NOIZ VPHM
WFR GPOR CLG FNSR ZONA
EMKR TMY DEZ IFO CBST
DIOD SWN MNG RCCC RNAI
ASYS ABP MRB TWTC CYTX
NETL FTO DMX INLD AMLN
MPWRE FPP SVL SBAC CERS
AMD PLLL SKP DCEL ARNA
LPSN ARD GROW NWRE AVII
ARTG APAGF ITG LANV RNVS
BITS MEK DHIL BWNG MYOG
SILC TGE NDAQ SNTO NRPH
VTAL ALY EFH PANL BCRX
CRM NTG TRAD TALX KNDL
HCO ENG CME GIGM ACAD
LGTY MDR AX TRDO BMRN
NUAN SWB ATI KNOT THLD
AZPN GAIA BSM AKAM CGPI
ICCA RONC NURO RATE AOB
ATEA NTRI HOLX KOMG HBX
LNUX DIET CASM SNDK QSC
INFA CVO NMTI LCRD ISV
PRLS CTTY RHAT ININ

Figure 1: FIVE-YEAR WEEKLY. These charts can give you a head start on looking for 10-baggers.


Thomas Maskell is an amateur investor with a large risk aversion and a small nest-egg. In addition, he has a degree in engineering and a master's degree in business administration, which means he knows just enough to be dangerous but not enough to be rich.

http://premium.working-money.com/wm/display.asp?art=633

Search For The 10-Bagger Fundamentals

Search For The 10-Bagger Fundamentals
07/03/07 04:53:06 PM PST
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by Thomas Maskell
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Though they may not be particularly rare, these elusive stocks hold promise nonetheless.


Recently, I received an email from a Technical Analysis of STOCKS & COMMODITIES reader inquiring if he had missed the follow-up articles in my series on searching for 10-baggers. I had to tell him that he had not missed them because I had not written them, having been distracted by a more pressing writing deadline. However, I promised to use his email as inspiration, which brings us to our subject today: finding 10-baggers using the techniques of fundamental analysis.

REVIEW
Figure 1 illustrates a typical 10-bagger. It is defined as a stock that increases in price 10-fold within a three-year period. Thus, it doubles in price every year over that period. Of course, 10-baggers aren't always typical; some may explode to 10-bag status in mere months, while others may lumber past the three-year time limit. Still others may go beyond 10-bag status to become 20-, 30-, and even 50-baggers. But they all follow the basic pattern shown but not necessarily the same time frame or maximum price.

Also illustrated in Figure 1 is the basic dilemma of stock investing (or trading or speculating): the problem of perspective. When we analyze a stock, we are looking backward. When we buy a stock, we need to look forward. When we analyze, we are working with facts, relationships, trends, and history. When we buy, we are peering into a dark room hoping that the light from behind us will illuminate the room in front of us.

FIGURE 1: A TYPICAL 10-BAGGER. Here you see a chart of a stock that increases in price 10-fold within a three-year period.

Thus, investors must generate two sets of loosely connected data. The first set is historical. Its main purpose is to educate the investor as to how well a company (and its management) has met previous challenges and capitalized on past opportunities. The second set is predictive. Its main purpose is to determine how the company will handle future challenges and opportunities. The first dataset (the cause) will lead you to a good company. The second dataset (the support) will lead you to a good investment. We shall explore both.

THE FUNDAMENTALS
Investing is quite different from trading and speculating. Traders are game players, while speculators are gamblers. Traders and speculators buy stocks, while investors are business people; they buy companies.

There are three basic investment strategies: dividend, value, and growth. Of these, only dividend is a pure investment strategy. The other two are a blend of investing, trading, and a dash of speculation. But dividends have no application to 10-baggers, since 10-baggers rarely pay a dividend. Our investment approach to 10-baggers will rely heavily on the rules governing growth and value investing.

Another aspect of our fundamental analysis is confidence. By that, I don't mean bravado; I mean statistical confidence. The more statistical confidence you have, the less risk you have. They are at opposite ends of a continuum. The objective of any stock analysis should be to increase our confidence that the course we choose will be profitable. In our fundamental analysis, we will do this by comparing our selected stocks to the market as a whole.



LOOKING BACK (CAUSE)
The past and present are defined in Figure 1 as the area to the left of the move point. That is the point at which we must buy. It is like an entrance to a dark room. Beyond that entrance is the unknown. So let's compare what we know about 10-baggers at or before their move. Hopefully, their past performance will uncover some trends that carry forward into that darkroom.

Since most investors will agree that earnings drive the market, Figure 2 compares the earnings per share (EPS) of 30 recent 10-baggers to that of the overall market. About 75% of the 10-baggers have a negative EPS compared to just 10% of the overall market. Further, only 3% of all 10-baggers have an EPS over $1. The market has about 55% in the over $1 EPS range. If earnings history is our guide, 10-baggers are a poor investment.

FIGURE 2: EARNINGS PER SHARE (EPS) DISTRIBUTION. Approximately 75% of the 10-baggers have a negative EPS compared to just 10% of the overall market.

But history must be viewed over time in the search for trends and extrapolations. Figure 3 looks at the EPS of our 10-baggers before and at their price move — that is, the known data. Unfortunately, it simply confirms what we learned in Figure 2. In fact, as a group, the 10-bagger's earnings looked better a year before their move. Their median EPS was slightly better (-0.12 versus -0.13), and more of them were positive (35% versus 25%). If there was any EPS trend at the move, it was downward. Apparently, EPS trends would not help us spot these 10-baggers.


FIGURE 3: 10-BAGGER EPS. As a group the 10-baggers' earnings looked better a year prior to the move. The results here indicate that EPS trends wouldn't help to spot the 10-baggers.

In the absence of earnings, investors often look to sales to establish a valuation. The most useful sales valuation metric is the price to sales ratio (PS). In Figure 4, the PS of our 10-baggers is compared to the PS of the overall market. It is clear from Figure 4 that 60% and more of our 10-baggers come from just 22% of the market. We have found our first distinguishing fundamental metric. By narrowing our search to stocks with a PS of under 0.50, our confidence is increased from 0.4% to 1.1%. Not very high, but much better than a random pick.


FIGURE 4: PRICE-TO-SALES (PS) RATIO. More than 60% of the 10-baggers come from 22% of the market. By searching for stocks with a PS under 0.5, confidence is increased from 0.4 to 1.1.

We can do a similar analysis for several other fundamental metrics and achieve similar results. For instance, analyzing price yields a confidence level of 0.86%, twice as high as a random pick. You can also double your confidence with a P/E comparison. But confidence levels of 1% are not very encouraging, and while it may be possible to improve those results using multiple variables, I have neither the time nor the space to explore that here. So we will look to the other critical aspect of fundamental analysis — potential.



LOOKING FORWARD (SUPPORT)
To my knowledge, no one has a crystal ball. The best we can do is spot past or current trends, but a trend cannot continue into the future without support, and the support we seek depends on potential. In fact, the past is prologue only if it reveals potential. So let's explore potential from a fundamentalist's perspective.

Potential depends on two factors: capacity and leverage — in essence, the capacity of a company to become profitable and its ability to magnify that profitability through leverage. A company with excess capacity and ample leverage has tremendous potential.

Capacity is a function of sales and assets: How many units can we produce in a factory versus how many they are currently producing? A good fundamental measure of it is the sales-to-asset ratio (S/A). Figure 5 compares the S/A of the overall market to our 10-baggers.

FIGURE 5: VARIOUS CAPACITY AND LEVERAGE METRICS FOR THE MARKET AND 10-BAGGERS. Here you see a comparison of the sales to asset ratio (SA) of the overall market to the 10-baggers. The 10-baggers seem to mirror the market to the high side, which is a positive indicator.

Leverage allows the company to magnify or extract the maximum profit from a given increase in sales. There are several kinds of leverage at work in a company. They include operating leverage, financial leverage, and various other synergies such as economies of scale and learning curves. We will focus on operating and financial leverage.

Gross profit (GP) is one form of operating leverage. It represents the potential profit available from each additional sales dollar: the higher the GP, the higher the potential. For instance, a company with a net income of 1% and a GP of 35% would grow its profits 3,500% if it doubled sales and held administrative and marketing costs constant. That's the power of leverage. Figure 5 also compares the GP of the overall market and our 10-baggers.

A company can also magnify their profits through financial leverage. A good metric for assessing financial leverage is shares outstanding (SO). The fewer SO a company has in relationship to their sales, the greater the profit those sales will deliver per share. This is somewhat related to PS, but there is enough difference that it is worth looking at on its own. Figure 5 does that.

The S/A is a double-edged sword in that a low number represents excess capacity that could be used to grow the company. But a low S/A could also imply that the management is not efficiently utilizing the assets, which is a negative. The S/A data in Figure 5 suggests that our 10-baggers are at least as efficient as the market as a whole, and they have the capacity to grow sales. There are many more aspects that underlie S/A, but the fact that our 10-baggers mirror the market to the high side can be viewed as a positive indicator for now.

In fact, all the data in Figure 5 suggests that 10-baggers, from start to finish, tend to reflect the overall market when it come to S/A, GP, and SO. There is no significant difference on which to build a high confidence projection, but it does indicate those 10-baggers are not stepchildren — overlooked or unloved stocks. In essence, they are not "value" investments.



THE SAD CONCLUSION
What you can derive from the data presented here is that there is nothing in the past performance of these companies that would allow us to spot them before their move. They are not value plays, which leaves growth as our only viable investment strategy. But as Figure 6 illustrates, even growth is of little help to us. The median growth of our 10-baggers was only 2.98% before their move, well below the median for the overall market. The 10-baggers didn't outperform the market until after their price move was made. In most cases, the stock moves six to 12 months before the company moves. There is simply no fundamental reason to buy these stocks — no cause. Sadly, the only conclusion you might make based on the dismal growth rate of these companies is that they are frogs waiting to be kissed.


FIGURE 6: ANNUAL SALES GROWTH RATES. The median growth rate for the 10-baggers was only 2.98% before their move. Essentially, there is nothing in growth rates that would lead us to believe that the stocks of these companies are about to experience a 10-bagger rally.



Yet over the life of their move (three years), these stocks more than doubled the growth of the market. They do not blossom without support. Within one year of their move they are outperforming the market and, like their price, by the end of their run they are growing 10 times faster than their premove growth rate. But there is nothing in that premove growth number (2.98%) that would lead us to believe these companies were about to launch. To the fundamentalist, the room remains dark and uninviting.

Thus, fundamentals can tell us a move is under way, but it can't tell us a move is about to happen. But the move did not just happen. Somebody knows something. Perhaps the traders have the answer, but that will have to wait until next time.

SUGGESTED READING
Maskell, Thomas [2006]. "The Search For The 10-Bagger Begins," Working-Money.com, March 23.
_____ [2006]. "The Anatomy Of The 10-Bagger," Working-Money.com, September 5.

http://premium.working-money.com/wm/display.asp?art=696

Are markets mental or physical entities?

Are markets mental or physical entities?

The questions just posed are interesting when we consider flocks of gyrating birds or the behaviour of human crowds, as psi is sometimes claimed to explain the antics of the former.

And stock market behaviour is a very good example of the often irrational and highly emotional activity of human crowds.

When we look at a graph of anything, we are observing a correlation (or mathematical mapping) of highly physical events.

• On one extreme, the plotting of average daily British temperatures is inviolate, even though various psychics have claimed to alter local conditions.
• On the other extreme, stock market performance reflects that very interesting borderland inhabited by desire and consequence.

The major difference between these two poles is that markets involve direct participation and feedback, something parapsychology has been trying to achieve for aeons.

The essential factor to bear in mind is that stock markets are driven by the twin passions of ‘greed’ and ‘fear’, prompting sharp movements up or down.

http://www.assap.org/newsite/Docs/Shares.pdf

The Anatomy Of The 10-Bagger

The Anatomy Of The 10-Bagger
09/05/06 05:41:26 PM PST
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by Thomas Maskell
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Shh! We're hunting for these elusive (but not particularly rare) stocks.


So far in our search for the 10-bagger, we have identified 588 stocks that doubled in price during the past 52 weeks (see part 1, in Working Money back in March 2006). A 10-bagger is a stock that increases in price 10-fold in three years or fewer. To do that, it must at least double in price in each of those three years--a requirement that is easily spotted using an online stock screen, such as the screen available at http://www.reuters.com/. Screening for these doublers, 588 in all, pointed the way to our 10-baggers.

NARROWING THE LIST
That list of 588 doublers was narrowed to 254 stocks to make the task of observing their charts less daunting. To get on this narrowed list, the initial price of the stock had to be greater than $0.01; it must represent a company based in the United States; and it must be traded on the New York, American, or NASDAQ exchanges. There are currently 5,210 stocks that fit those criteria, which means our 254 stocks are 4.88% of that total.

Using a stock charting service like bigcharts.com will allow us to quickly observe these 254 stocks and identify the 10-baggers. Of course, identifying a 10-bagger by chart requires a set of its own criteria. The criteria are launch point, move duration, and peak price. The launch point is the date that the stock closes above its six-month simple moving average (SMA). Its move duration is the time it takes to move from launch to its peak price. Its peak price is the highest open or close price achieved during the move. For ease of observation, I based this discussion on a five-year monthly chart. Daily and weekly charts will help you fine-tune the analysis, but they lose a lot of instructional value on reproduction. Using monthly charts and the criteria given, 44 of the 254 stocks were identified as 10-baggers.


FIGURE 1: AN IDEAL 10-BAGGER. Hansen Natural (HANS) started its move in July 2003 when it closed above its six-month SMA. Over the next 33 months it didn't fall more than 10% below the SMA. The stock climbed to a peak of $148.20 by March 2005.



THE 10-BAGGERS
Figure 1 is a screen capture that illustrates an ideal 10-bagger. I say ideal because many 10-baggers are not this perfect. Of the 44 10-baggers gleaned from our list of 254 potentials, 35 fit this ideal. What is the ideal? It is a stock that closes above its six-month simple moving average (SMA) and does not close more than 10% below SMA during its 10-fold rise. In Figure 1, Hansen Natural Corp. (HANS) began its move in July 2003 when it closed above its six-month SMA at $2.55. Over the next 33 months, it never fell more than 10% below SMA as it climbed to a peak price of $148.20—a 58-bagger. It was a 10-bagger within 20 months (March 2005). In addition, during the stock's rise, its monthly trading volume increased. This is hard to see in Figure 1, so I have replotted it in Figure 2 as both an absolute number and as a percent of the total shares outstanding. Prior to launch, the three-month moving average (MA) in Figure 2 hovered around 250,000 shares. In the launch month, 647,000 shares were traded, more than double the MA. Within seven months of launch, the MA was more than one million shares; and within a year, it was more than 12 million shares. The stock volume began to subside in August 2004, and then increased again in March 2005, the month it achieved 10-bagger status. From there, it went on to higher prices and greater volumes.


FIGURE 2: TRADING VOLUME. The percent of shares outstanding (SO) rose above 100% in May, June, and July 2005. When a company's stock trades more than 100% of its SO in one month, it's something worth noting.

Two other interesting points should be noted about this volume. The first, as seen in Figure 2, is the percent of shares outstanding (SO) that was traded on average each month. It rose above 100% in May, June, and July 2005. (The monthly volume reached that level in June 2004.) The concept of a company trading more than 100% of its shares outstanding in one month is intriguing. The second point and equally intriguing is the number of shareholders in HANS, not shown in Figure 2. From the point of launch to the peak price, the number of shareholders in HANS was reported to have declined from 619 million to 514 million. More shares were traded by fewer shareholders. This would suggest an institutional rather than a general market binge. If this holds true for most 10-baggers, it could be a useful bit of information.

Let's move from the ideal to the sublime. Figure 3 presents the stock chart of Ampex Corp. (AMPX). AMPX is not on our list of 44, but it is a mouth-watering chart that illustrates a compressed 10-bagger. Technically, AMPX launched in February 2004 after two false starts (November 2002 and May 2003). Its launch price (at close) was $1.75, but it achieved that price on a monthly volume of only 320,000, half of the preceding MA. After launch, its price managed to just track its SMA for the next seven months on decreased volume. Given that its two failed breakouts were volumes that were two and four times greater than the MA, ignoring this launch would have been a prudent course of action. This brings us to October 2004.


FIGURE 3: IDEAL TO SUBLIME. Notice how this stock moved from $1.85 to $50.04 in four months. It then declined by 65% to $17.45 but it's still a 10-bagger from its February launch price of $1.75.

In October 2004, AMPX's price moved from $1.85 to $4.09 on a volume of 397,000, three times the preceding MA. That was followed with a close of $11.40 on volume of 1,116,000 in November, a close of $39.50 on 4,933,000 in December, and a close of $50.04 on 1,664,000 in January 2005. In four months it moved from $1.85 to $50.04, a 27-bagger. Three months after its peak price, it closed at $32. After a modest uptick, it continued to slide, closing at $17.45 on May 6, 2006—a decline of 65% from its peak price, but still a 10-bagger from its February 2004 launch price of $1.75.

Figure 3 illustrates how difficult it is to establish rules. If you bought the launch in November 2002 and used 10% below the SMA as a sellpoint, you would have sold the stock the next month at a 50% loss. Your next entry point would be May 2003 with a sale in October for another 30% loss. You could enter again in February 2004 (assuming you weren't too battle-fatigued to continue), with a sale in August 2005 for a gain of 1,700% (finally!). If you started with $10,000, you would have ended up with $64,000, a six-bagger—not a bad return over 34 months. If you ignored the February entry and waited until October, you would have ended up with $27,384, still not bad.

A 27-bagger can compensate for a lot of flaws in an investment plan. If AMPX was just a 10-bagger, selling on a 10% correction would have resulted in a loss of about $150. So any rules we use to guide our stock decisions would have to be statistically significant. Statistics are the study of populations and behaviors. Any quantifiable population or behavior can be analyzed using statistics. In business, statistics are used to improve decision-making. A businessman strives for an 85% confidence level; he wants 85% of his decisions to be correct. While he may strive for 85%, it has been reported that most successful managers are correct only 70% of the time. If we could create rules with a 70% to 85% confidence level, we would have a very powerful stock market strategy.




FIGURE 4: PRICE CORRECTIONS OF TEN BAGGERS. Here you see how many of the stocks corrected and by how much. The statistics provided here give you some idea of the basic chart patterns of the listed stocks.
In Figure 4, the 44 10-baggers are listed. Also listed are their price corrections in comparison to their six-month SMA. Eleven of the 44 stocks corrected twice while 14 did not correct (according to our definition). Two stocks are listed as having corrected and not corrected. These are stocks that had a correction after achieving 10-bag status but then went on to new highs. I included that second correction, but you may choose to ignore it. At the bottom are a few simple statistics, which will help us establish some rules. I recognize that these are very basic, but even the basics can be useful. The data presented is sorted by "Correction %." Half the stocks corrected 7.4% or less during their advance. Twenty-seven (61%) of them corrected 10% or less. The 10% (or less) limit also represents 35 of the 55 corrections (64%). Thirty-three of the stocks did not correct or corrected only once (75%). Eleven corrected twice. There were as many corrections greater than 20% (14) as there were corrections at zero percent. Just based on these statistics, it is difficult to establish a significant sell strategy. Certainly, if we are to achieve a 70% confidence level, we will need more information.

THE REWARDS
Now that we have identified our 10-baggers and observed their basic chart patterns, it is time to gather more information. The goal is to answer two questions. First, why did these stocks launch (cause)? Second, why did they continue to rise (support)? The cause will help us predict their move, and the support will help us predict their peak.

Since there are three kinds of players in the stock market, we will approach this study from three different perspectives. First, we will approach it as investors and study the underlying fundamentals. Second, we will become traders and look for clues in the charts. Finally, as speculators, we will go beyond the fundamentals and the indicators; we will anticipate price based on events, trends, and innovations. Somewhere, in that mix of market strategies and historical data, we hope to find the key to unlocking the rewards of the 10-bagger.



SUGGESTED READING
Maskell, Thomas [2006]. "The Search For The 10-Bagger Begins," Working-Money.com, March 23.

http://premium.working-money.com/wm/display.asp?art=660

Where you'll find the double-baggers

Where you'll find the double-baggers

Small caps' tendency to outperform their large-cap brethren isn't just a down-market happenstance -- it held true in 2005, 2006, 2007, and 2008 as well.

In any market, the stocks with the most potential for outsized returns (stocks that will double, triple, or even increase your investment tenfold) are not found among large caps, but rather among stocks that are:

1.Ignored.
2.Obscure.
3.Very small.

Why? Because the market's greatest inefficiencies (and, thereby, greatest opportunities) lie hidden among the investments that Wall Street analysts and institutional investors shun only because of their size.

Starting today

Investing in small-cap stocks makes many people nervous -- and today's market volatility is sending many people into the arms of stable, financially pristine large-cap stocks. Which makes now an even better time to buy up those oversold small caps.

But not all small caps are equal. You want to make sure you buy small caps that have a rock-solid balance sheet and a solid business model. Both these factors ensure that the company will be around five to 10 years from now, giving it plenty of time to double, triple, or increase tenfold in size.

At Motley Fool Hidden Gems, these are precisely the kinds of stocks we're recommending right now -- and we're putting real money behind our best ideas. What's more, our recommendations are beating the market by an average of 18 percentage points since the service began in 2003.


http://www.themoneytimes.com/featured/20090904/these-stocks-can-easily-double-your-money-id-1082594.html

CANADA TIP SHEET: Law Hunts For 10-Baggers

CANADA TIP SHEET: Law Hunts For 10-Baggers

By Nirmala Menon
Dow Jones Newswires
18 May 2006

OTTAWA (Dow Jones) -- As a small-cap fund manager, Jennifer Law tries to sniff out potential "10-bagger" stocks. She thinks Katanga Mining Ltd. (KAT.V) may eventually prove to be a winner.

Ten-baggers are stocks that increase their value 10-fold.

Law bought Katanga earlier in the year for the CIBC Canadian Small Companies Fund that she lead-manages. But it could take about a couple of years for the company, which owns a big copper project in the Republic of Congo, to show its potential.

"You don't expect them to produce immediately, but you watch as they come on production in 2007, I think that will give a nice lift to the portfolio," Law said in an interview.

"With Africa becoming a more important copper producer, we're sort of taking a little bit more risk, branch out a little bit and finding a next winner," she said.

She builds smaller positions in established winners, such as First Quantum Minerals Ltd. (FM.T), which she bought a few years ago and which emerged as a 10-bagger.

"We try to layer on some more smaller positions that we can build into core positions over the next two years if management delivers what they promise," Law says.

HudBay Minerals Inc. (HBM.T) is another stock that has been an "exceptional performer" for the fund since Law bought it at the initial public offering for C$2.20 a share. The stock came with warrants.

She bought more warrants at 3.5 Canadian cents each and that has risen to become "almost a 10-bagger." She bought more of the stock and warrants in anticipation of strong fourth-quarter earnings, and describes subsequent gains as "pretty sweet."

HudBay is trading at C$13.33 in Toronto Thursday.


Recipe For Making Money In Small-Caps

As a bottom-up investor, what attracts her the most about a company are the qualitative aspects: the management, the product or service, the competitive landscape, how a company sets itself apart to compete, and catalysts for growth.

She keeps sector bets "small and measured" and says she runs a balanced portfolio with exposure to all 10 sectors. Nearly half the fund is invested in energy and materials stocks, reflecting their dominance in the market.

Law says the key to making money in Canada's small-and- mid-cap market is to get a foot in the door early before a company's earnings are included in forecasts.

"If you're there early, you get to know management well, really understand the business, that's where you can outperform and that's when you can make good money," she says.

Law has spent nearly her whole career managing small-caps funds. She started managing the Canadian Small Companies Fund in 2003 and helped turn it from a fourth-quartile fund to the current second-quartile ranking. As of April 28, the fund had assets of C$123.9 million (US$112 million).

The portfolio is run on GARP principles - growth at a reasonable price - but has a lower beta than is typical for the riskier small and mid-cap asset class.

"The beta for this portfolio tends to be 10-15% lower than the benchmark. We're not taking as much risk as the benchmark," Law says.

The price-earnings multiple is also lower, and the return on equity tends to be better than the benchmark. "I think as an investor, you get the best of both worlds," Law says.

She can hold winner stocks until they reach a market capitalization of C$6 billion, unlike other small-cap funds where the limits are much lower.

"That's a really nice flexibility within this mandate (the Canadian Small Companies Fund) that the unit-holder is probably not aware of," says Law.

Law doesn't see "lots of great new ideas" in the market right now.

"We'll continue to dig and find some little nuggets here and there, but overall, I think the biggest call this year is when to take profit on the commodities and the rest of it is just really boring, bottom-up work," she says with a laugh.

(c) 2006 Dow Jones & Company, Inc.

http://www.cibc.com/ca/am/pdf/news-publications/in-the-media/law-dowjones-en.pdf

Bottoming stocks flare 100-1,500% post Sept 11, 2001

Bottoming stocks flare 100-1,500%

B G Shirsat

Stocks which plummeted to their 52-week lows during the last six months gave huge returns. One hundred and sixty four such stocks, identified by the Business Standard Research Bureau, which plumbed their year's lows after September 2001, have turned out to be a gold mine for investors. Their prices flared by 100 per cent-1,500 per cent in the subsequent period.

The returns on the stock indices, over the September 21 level when stock indices declined to almost a nine-year low, vary between 33 per cent (Sensex up 33.82 per cent, S & P CNX Nifty up 33.3 per cent) and 52 per cent (BSE 500 and BSE 200 up around 52 per cent).

Of the 164 stocks studied, the value of four increased 10 times (10 baggers), or by 1,000 per cent. As many as 17 stocks became 5-10 baggers, and 64 others 3-5 baggers. The rest have doubled in value during the period.

Hinduja TMT fell to Rs 32 on September 26 in line with the continuing meltdown in second-rung technology stocks after September 11, 2001.

The booster came from the healthy performance in the quarter ended September 30, 2001. The stock became a 10 bagger in six months.

MphasiS BFL soared to Rs 646.95 on April 11 from Rs 70.35 on October 12, 2001, up 820 per cent. The Financial Technology scrip gained 708 per cent from Rs 7.50 on September 26 to Rs 60.60 on Thursday, even though the company reported a loss of Rs 67.5 million in the nine months between April-December, 2001. The upside is that the company is engaged in a single business segment, providing end-to-end straight through processing (STP) technologies.

The other winners were Fortune Information, up 1,289 per cent at Rs 69.45, Mastek, up 592 per cent at Rs 366.60, IT & T, up 563 per cent at Rs 48.10 and Blue Star Information, up 570 per cent at Rs 194.70.

Take also Praneta Industries, an unknown penny stock trading at Re 0.90 on March 6, 2002. A month later, it surged to Rs 13.45 (April 10), registering a 1,500 per cent rise.

The market was unfavourable to KPIT Infosystems which declined to almost an all-time low of Rs 13 in September, 2001. The numbers for the October-December 2001 quarter, too, were not favourable.

However, investors bet on this stock for the simple reason that during 2001-2002 the company added six new customers who had the potential to bring significant business during 2002-03. The stock became a top multi-bagger with a 1,353 per cent rise in market price.

Apple Amusement bottomed out at Rs 2.65 on October 17, 2001. Operators entered at this juncture and the stock went up to Rs 25.15 on April 11, 2002, getting returns of almost 10 times.

http://search.rediff.com/business/2002/apr/12bot.htm

Buy Low, Sell High With Sir John Templeton

Buy Low, Sell High With Sir John Templeton

Thursday, June 19, 2008 4:22 PM

By: Michael Carr


Always on the hunt for the next great investor, Forbes magazine recently profiled Randolph McDuff, a virtually unknown online trader in Canada who has delivered gains of 32.2 percent a year for the past eight years.


That's almost three times more than Warren Buffett’s Berkshire Hathaway over the same time frame.


Like Buffett, McDuff is a value investor. But lacking Buffett’s ability to consistently find big winners, McDuff has adopted instead the style of Sir John Templeton. He seeks to identify a list of relatively inexpensive stocks.


Templeton, now 96, has been an investment superstar for more than six decades. He made his first investment gains by buying 100 shares of every stock selling for less than $1 a share at the beginning of World War II.


By the time the war ended, almost a third of the companies he had bought into were bankrupt. But his overall investment had returned more than 200 percent.


From there, Templeton went on to found one of the largest mutual fund companies in the world. Eventually he sold Templeton Funds to Franklin Resources, although he is still an active investor.


Known as a global investor, Templeton applies simple concepts to identify potential stock market winners. These factors were used to develop this Templeton value screen:


• P/E ratio less than the five year average P/E ratio for the stock and below the average ratio of all companies in the same industry.


• Earnings per share growing each year for the last five years and projected to increase in the current year. Additionally, the company needs to have forecasted earnings growth greater than the industry average.


• Operating profit margins better than industry average and showing steady improvement over the past five years. Operating margin is the ratio of operating income to sales. This is Templeton’s preferred measure of management quality. When a company's margin is increasing, it is earning more for each dollar of sales.


• Less debt than the industry average demonstrates to Templeton that the company is conservatively managed and likely to make money even in downturns. This is an important criterion for an investor who learned his craft during the Great Depression.

http://moneynews.newsmax.com/michael_carr/carr_templeton_screen/2008/06/19/105999.html

Finding Peter Lynch’s 10-Baggers

Finding Peter Lynch’s 10-Baggers

Tom Gardner has made it his mission to uncover the best underfollowed, underappreciated companies before Wall Street gets on board. The legendary Peter Lynch once had a few things to say on the subject, and Tom thinks investors should listen up.

By Tom Gardner
November 23, 2005


Peter Lynch is recognized by investors the world over. More than 1 million read his book One Up on Wall Street (or, at least, that many bought it). Sadly, many seem to have either disregarded or forgotten the book’s tenets for finding great investments.

That’s a shame. After all, the greatest of these investments — in his words, the “10- to 40-baggers … even 200-baggers” — can rise 10 to 200 times in value.

I haven’t forgotten. A “student” of Lynch for years, I don’t deny that what I’ve learned has influenced the way I invest. Nor that, when we conceived of our Motley Fool Hidden Gems newsletter service and online community, digging up just a few of these “10- to 40-baggers” was very much on our minds.

It might be worthwhile, then, to take a look at six of his primary principles, all of which are core components of our Hidden Gems investing approach. I strongly encourage you to consider them when building or fine-tuning your own stock portfolio.

1. Small companies
Lynch loves emerging businesses with strong balance sheets, and so do I. His extraordinary returns in La Quinta Inns came when the company was young and small, traded at a discount to estimated future growth, and sported a healthy balance sheet. He writes: “Big companies don’t have big stock moves … you’ll get your biggest moves in smaller companies.”

Couldn’t have said it better myself. When searching for prospects, I focus explicitly on strong, well-run companies capitalized under $2 billion.

2. Fast growers
Among Lynch’s favorites are companies whose sales and earnings are expanding 20% to 30% per year. The classic Lynch play over the past decade might be Starbucks, which has consistently grown sales and earnings at superior rates. The company has a sterling balance sheet and generates substantial earnings by selling an addictive product, repurchased every day at a premium by its loyal customers.

The real trick is to find fast growers such as Starbucks or Amazon.com (Nasdaq: AMZN) in their early stages. At the same time, don’t shy away from a slower-growth business selling at a truly great price. Hidden Gems can take either form.

3. Dull names, dull products, dead industry
You might not think this of the world’s greatest — and, arguably, most famous — mutual fund manager, but Lynch absolutely loved dreary, colorless businesses in stagnant or declining industries. A company such as Masco, which developed the single-handle ball faucet (yawn), rose more than 1,300 times in value from 1958 to 1987.

And if he could find that kind of business with a ridiculous name, like Pep Boys, all the better. No self-respecting Wall Street broker could recommend such an absurdly named unknown to his key clients. And that left the greatest money managers an opportunity to scoop up a truly solid business at a deep discount.

4. Wall Street doesn’t care
Lynch’s dream stock at Fidelity Magellan was one that hadn’t yet attracted any attention from Wall Street. No analysts covered the business, which was less than 20% institutionally owned. None of the big money cared. Toys “R” Us, though it might not be so great an investment today, went on in relative obscurity to rise more than 55 times in value after being spun out from bankrupt parent Interstate Department Stores.

And Lynch is effusive in explaining the wonderful returns from funeral and cemetery business Service Corporation, which had no analyst coverage. Compare that with the 38 analysts who cover Intel (Nasdaq: INTC) or the 31 following Yahoo! (Nasdaq: YHOO).

The point is clear: Small, underfollowed companies present the greatest opportunities to long-term investors.

5. Insider buying and share buybacks
Lynch loves companies whose boards of directors and executive teams put their money where their mouths are. A combination of insider buying and aggressive share buybacks really piqued his interest. He would have given a close look to a tiny company like Ultralife Batteries (Nasdaq: ULBI), which has featured persistent insider buying recently, but also Dell (Nasdaq: DELL), which methodically buys back its shares on the open market.

“Buying back shares,” Lynch writes, “is the simplest, best way a company can reward its investors.” Bingo.

6. Diversification
Finally, don’t forget that Lynch typically owned more than 1,000 stocks at Fidelity Magellan. He embraced diversification and focused his attention on upstart businesses with excellent earnings, sound balance sheets, and little to no Wall Street coverage. He admits that, going in, he never knew which of his investments would rise five or 10 times in value. But the greatest of his investments took three to four years to reward him with smashing returns.

I anticipate an average holding period of three years, with the greatest of the group being held for a decade or more. I believe you can and should run a broad, diversified portfolio of stocks, if you have the time and the team to do so — like we do here at the Fool and within our Hidden Gems community.

Finding the next prospect
Peter Lynch created loads of millionaires with his Fidelity Magellan Fund — investors who went on to live comfortably, send their kids to college, and give generously to deserving charities.

You might be surprised to hear that he thinks you can succeed at stock investing without giving your whole life over to financial statement analysis. He’s outlined a method whereby the total research time to find a stock “equals a couple hours.” And he doesn’t think you need to check back on your stocks but once a quarter. Doing more than that might lead to needless hyperactive trading that wears down your portfolio with transaction costs and taxes.

Written by Saumil Mehta
November 24th, 2005 at 12:41 pm


http://www.valuestockplus.net/2005/11/finding-peter-lynchs-10-baggers.html

Accuracy and Peter Lynch’s 10-Baggers

Common Sense Investing: Accuracy and Peter Lynch’s 10-Baggers


I’ve been an investor since before college, and I’ve been a successful investor for almost as long. I talk to other investors, I do research, and I browse the online investing communities. And through all that, I’ve noticed that there is one similarity that you can see in all successful investors: They don’t have 100% accuracy.

My accuracy is around 75% at most, but thats it; and I’m considered an All-Star in the online investing communities. That means generally, 75% of the stocks I pick do better than the S&P. It also means that 25% of them won’t be winners. But, I do my due diligence, I stick to well managed companies that have fast earnings growth, relatively high insider ownership, low P/E for the industry, good returns, and the 7 out of 10 that do beat the S&P beat it by a lot. That’s the key. When you get into investing, you have to have thick skin, you can’t cut and run when a stock goes down and you can’t get discouraged when half of your stocks aren’t beating the market. That’s just how it goes.

Remember Peter Lynch’s theory on 10 baggers:
Say you pick 5 stocks, and you’ve done all the research you can and you’re sure these are solid companies. Well some of them might go down, but even if 4 of the 5 are losers, if you hit just one 10 or 20 or 200 bagger, it makes up for the rest (a 10 bagger is a stock that increases 10 times in value). Look for 10 baggers, look for quality, and you’ll win out every time.

In case you don’t know who he is, Peter Lynch’s Fidelity Magellan fund (FMAGX) returned 29% on average, annually, during Lynch’s 13 years at the helm.

So, if you’d like to learn more about Peter Lynch’s style of investing, check out his book, One Up on Wall Street. It really is one of the best books on investing ever written.

http://csinvestor.com/common-sense-investing-accuracy-and-peter-lynchs-10-baggers/

Invest like the masters: James O'Shaughnessy

From MoneySense magazine, November 2006

Invest like the masters: James O'Shaughnessy

We've plumbed the minds of four great stock pickers to find your smartest investments.
Warren Buffett David Dreman Peter Lynch James O'Shaughnessy

James O'Shaughnessy

He looked back over decades to find the best stock-picking strategies of all time. We've taken one of his best methods and gone searching for values in the Canadian market.

James O'Shaughnessy is know to most investors as the author of What Works on Wall Street. In this ground-breaking work, published in 1996, O'Shaughnessy evaluated the record of many by-the-numbers investment strategies over decades. After writing his book, O'Shaughnessy put his results to work by launching several U.S. and Canadian mutual funds based on his findings.

Unfortunately, he ran smack into the Internet bubble. The dull, value-oriented stocks turned up by his methods performed poorly and he got roasted in the press. However, in more recent years his funds have performed very well. For instance, his U.S.-based Cornerstone Value Fund has bested the S&P 500 over the past five years by an average 2.19 percentage points a year and has done so with less volatility than the index.

We decided to focus on his Cornerstone Value approach because we're fond of dividends. Like all of O'Shaughnessy's methods, it's a by-the-numbers affair, without any deeper research into individual companies. The Cornerstone Value method starts with "marketleading" stocks, which are defined as those with large market capitalizations, an above-average number of shares, more than an average level of cash flow per share, and more than 1.5 times the average level of sales. From this market-leading group, O'Shaughnessy selects the highest yielding stocks — but he excludes utility companies, to ensure they don't dominate the list.

To apply the Cornerstone approach to the Canadian market, we decided to define market-leading stocks as those with annual revenues of at least $2 billion, market capitalizations of at least $1 billion and an annual net income of at least $500 million. We then sorted this list of big stocks by dividend yield and selected the top 10 for O'Shaughnessy's darlings. We did, however, add our own twist. In the U.S., O'Shaughnessy had trouble with too many utilities dominating his results; in Canada, we encountered a similar problem with banks and other financial institutions. To avoid too much concentration in the financial sector, we allowed a couple of utilities to slip through, but we also selected only the highest yielding stock from each industry sub-group. The result is a more diversified list, but one which still pays a generous average dividend yield of 2.9%.

In many ways, O'Shaughnessy's Cornerstone Value method is similar to the venerable Dogs of the Dow approach, but it ranges wider in its search for large dividend-paying stalwarts. As a believer in high-yield stocks, we expect that stocks with generous dividends will continue to do well over the long run. But remember that even the most successful methods will have off years, as the O'Shaughnessy funds demonstrated in their early days.

O'Shaughnessy's darlings


CompanyIndustry
Price DividendYield P/E ROE

BCE Inc.Telephone utility
$30.22 4.33% 15.3 14.9%
Bank of MontrealBank
$68.65 3.68% 13.2 18.7%
TransCanadaGas utility
$35.48 3.64% 13.3 17.6%
Teck ComincoMining
$71.31 2.85% 7.4 35.4%
Husky EnergyOil and gas
$72.20 2.83% 11.2 29.2%
Sun Life FinancialInsurance
$46.56 2.57% 14.2 12.6%
Power Corp.Conglomerate
$32.38 2.47% 13.5 16.4%
Thomson Corp.Business services
$45.20 2.25% 29.4 9.4%
Magna InternationalAuto parts
$81.99 2.17% 11.9 10.7%
George WestonFood stores
$72.39 2.00% 13.2 16.2%


Source: globeinvestor.com, Sept. 28, 2006

http://www.canadianbusiness.com/my_money/investing/article.jsp?content=20061128_104200_3896

Invest like the masters: David Dreman

Invest like the masters: David Dreman

We've plumbed the minds of four great stock pickers to find your smartest investments.
Warren Buffett David Dreman Peter Lynch James O'Shaughnessy

David Dreman

This expatriate Canadian wrote the book — literally — on contrarian investing. His key finding? You can achieve great results by choosing cheap stocks that the market hates.

After graduating from the University of Manitoba in the 1950s David Dreman got his start as an analyst at his father's Winnipeg-based commodities trading firm. But Wall Street beckoned and he soon moved stateside where he has run a money management firm in Jersey City, N.J., for decades.

Dreman is perhaps best known as an author. His Contrarian Investment Strategies: The Next Generation deserves a spot on every investor's bookshelf. But he's no slouch when it comes to putting his book learning to the test and beating the market. His firm's large-cap value composite has bested the S&P 500 index by an average of 3.9 percentage points annually over the last 10 years, before fees. His small-cap value composite beat the Russell 2000 by 6.6 percentage points over the same period.

Dreman looks for stocks with low price-to-earnings ratios (P/E). These stocks are typically out of favor with investors for one reason or another. But often that's because investors have overreacted to bad news. As a group, low P/E stocks have a tendency to bounce back and perform well. In fact, Dreman calculates that U.S. stocks with the lowest 20% of P/E ratios provided average annual returns of 16.8% from 1920 to 2004, beating the market by four percentage points.

You might think that people would look at those figures and be lining up to buy low P/E stocks. The reality, though, is that investing in these firms requires courage. A good example is Dreman's investment in Altria, the cigarette company formerly known as Philip Morris. Altria has been a phenomenal performer over the long term, but it's been pummeled in recent years by tobacco-related litigation. You have to be confident in your judgment to buy a stock like Altria in the face of such overwhelming uncertainty.

Dreman's focus is on the U.S. market, but we decided to apply his methods closer to home and look for large Canadian stocks that he might like. We started with companies that earned at least $250 million from continuing operations over the last year. We then focused on stocks with the lowest positive P/E ratios. Dreman also looks for financial stability, so we required each stock to have less debt than shareholder equity as well as some revenue growth over the last three years. These criteria produced the list of 10 stocks shown in Dreman's value list. In addition to each stock's P/E and debt-to-equity ratio, we also show its dividend yield. After all, it's nice to be paid to wait for better times.

We think that low-P/E stocks will continue to earn more than their higher P/E brethren over the long haul— but such a happy result is not going to happen every year. You only have to go back to the Internet bubble to spot a period when Dreman's stocks trailed. On the other hand, low-P/E stocks usually shine during market downturns. So if you have a gloomy view of what lies ahead, you might find these stocks very much to your taste.

Dreman's value list


CompanyIndustry
Price P/E Debt/Equity Dividend Yield

EnCanaOil and gas
$52.56 6.1 0.42 0.89%
IPSCOSteel
$96.55 6.6 0.18 0.84%
E-L FinancialInsurance
$600.00 6.9 0.00 0.08%
Teck ComincoMining
$71.31 7.4 0.45 2.85%
Gerdau AmeristeelSteel
$10.31 7.7 0.34 0.90%
ING CanadaInsurance
$55.14 9.3 0.05 1.83%
Empire CompanyFood stores
$40.98 9.7 0.47 1.50%
CP RailwayTransportation
$55.23 10.6 0.68 1.38%
TD BankBanks
$66.80 10.8 0.56 2.91%
Talisman EnergyOil and gas
$18.57 11.1 0.74 0.80%


Source: globeinvestor.com, Sept. 28, 2006

http://www.canadianbusiness.com/my_money/investing/article.jsp?content=20061128_104112_4584

Invest like the masters: Warren Buffett

From MoneySense magazine, November 2006

Invest like the masters: Warren Buffett

We've plumbed the minds of four great stock pickers to find your smartest investments.
Warren Buffett David Dreman Peter Lynch James O'Shaughnessy

Want to invest like a master? Then look to the works of Warren Buffett, Peter Lynch, David Dreman, and James O'Shaughnessy. These four gentlemen are all great investors, and all of them have either written books on how to invest or, in Buffett's case, produced years of informative shareholder letters. Remarkably, none are shy about sharing their market-beating techniques. In this feature, we examine how each of these wizards thinks and we spell out what each looks for in a stock. But that's just for starters. We've also scoured the markets for stocks that our famous investors might be interested in buying right now. To provide a truly continental perspective, half of our picks come from the U.S. and half from Canada.

We think you'll find a few of these gems to be just right for your portfolio. Remember, though, that not even a great investor beats the market each and every year. To make sure that a given stock is right for you, take out your magnifying glass and examine any investment in detail before putting your money down. Remember that you should spend at least as much time thinking about what could go wrong as what could go right. After all, that's what the best investors do.

Warren Buffett

The greatest investor in history likes to buy quality companies trading at reasonable prices. Oddly enough, the firm that may best fit that description is his own,

When he was five, Warren Buffett set up a gum stand outside his home and sold Chiclets to passersby. Now 76, Buffett still knows how to make a buck. He's the second-richest man in the U.S. (trailing only his friend, Bill Gates) and is starting to give away his fortune to charity. Along the way to his billions, Buffett studied and worked with the venerable Benjamin Graham, the father of value investing, before opening up his own hedge fund in the 1950s. But most people know Buffett as the principal owner of Berkshire Hathaway, which he runs out of a small head office in Omaha, Neb.

Buffett started buying stock in Berkshire Hathaway, then a distressed textile firm, in 1962, when its shares were trading below $8 per share (all prices in U.S. dollars). Today Berkshire Hathaway is a sprawling conglomerate with large insurance operations and trades above $96,000 per share. The trip from $8 to $96,000 represents an average annual gain of about 24% over more than 40 years. Talk about the power of compounding!

In recent years, Buffett has moved away from buying publicly traded shares in favor of acquiring entire private companies in friendly transactions. Nonetheless, he continues to buy a few public stocks — usually in quality companies trading at reasonable prices.

If you want to benefit from Buffett's stock-picking acumen, the simplest route is to invest in his company. (If $96,000 for a Berkshire Class A share sounds a mite steep for your wallet, you can choose instead to pick up "B" shares for only about $3,200 apiece.) In recent years the stock has stalled, partly due to fears that Buffett may not live much longer. Nonetheless, Berkshire Hathaway is the epitome of a quality company. It trades at a below-market price-to-earnings ratio (P/E) of 14.3 and a low price-to-book-value ratio of 1.5. In our view, it's a bargain without Buffett and a steal with him.

Another way to cash in on Buffett's eye for a deal is to buy what Berkshire Hathaway has been buying. Berkshire has bought into several public companies over the past year. By delving into regulatory filings and news releases we selected 10 such stocks for Buffett's best stocks. We wanted to reassure ourselves that the stocks haven't gained too much since Berkshire Hathaway's recent purchases, so we show each stock's price appreciation over the last year. Amazingly, you can buy many of these stocks at or below the price that Buffett recently paid.

While we don't think that buying Buffett's best stocks will automatically produce 24% returns, we do think that our list is a good place for any Buffett-style investor to start looking for prospects. For more insight into Buffett's style, read his frank and funny annual letters to shareholders. You'll find a free archive of them at BerkshireHathaway.com.

Buffett's best stocks


Company Industry
Price* P/E ROE 1-yr. Gain
ConocoPhillips Oil and gas
$59.53 5.5 25.8% -14.9%
Home Depot Home improvement
$36.27 12.4 23.6% -4.9%
TycoConglomerate
$27.99 17.3 11.4% 0.5%
United ParcelDelivery services
$71.94 19.6 24.1% 4.1%
General ElectricConglomerate
$35.30 22.0 17.4% 4.8%
Anheuser-BuschBeer
$47.51 19.7 55.7% 10.4%
Wal-MartDiscount stores
$49.32 19.3 22.1% 12.6%
TorchmarkInsurance
$63.11 13.2 15.0% 19.5%
Wells FargoBank
$36.18 15.4 19.7% 23.5%
USGBuilding materials
$47.07 — — **

Source: yahoo.com, Sept. 29, 2006
*In U.S. dollars
**Recently emerged from bankruptcy

http://www.canadianbusiness.com/my_money/investing/article.jsp?content=20061128_104045_4328

Invest like the masters: Peter Lynch

From MoneySense magazine, November 2006

Invest like the masters: Peter Lynch

Peter Lynch

He achieved 29%-a-year gains by looking for fast-growing firms trading at reasonable prices. We've applied his philosophy to turn up 10 of today's most interesting prospects

Peter Lynch caught the stock bug in his youth while caddying at his local golf course. One of the golfers was the president of Fidelity, the huge mutual fund firm in Boston. He invited Lynch to join his firm — and the move proved to be fortunate for everyone as the former caddie turned into the Tiger Woods of investing.

How good was Lynch? Well, he coined the term "10-bagger" to describe a stock that grows to be worth 10 times its original price. Most investors would be very happy to pick a few 10-baggers in their lifetimes — but if you had invested in Fidelity's Magellan fund when Lynch started managing it, you would have nabbed a 28-bagger. Yes, a $1,000 investment in Fidelity's Magellan fund in 1977 would have blossomed into $28,000 by the time Lynch retired in 1990. That's a remarkable average annual return of 29.2%.

Aside from providing blowout returns, Lynch wrote three investment books in which he expounds on his methods and investment philosophy. His bestsellers, One Up On Wall Street and Beating the Street, are probably the most useful tomes for most investors.

As you'll discover in those books, Lynch is the most growth-oriented of our four master investors, but he still keeps a keen eye on value. To find stocks that Lynch might like, we started with what he calls fast growers. These are stocks of small aggressive companies that are growing their earnings at a rate of between 20% and 25% a year. Lynch notes, "If you choose wisely, this is the land of the 10- to 40-baggers, and even 200-baggers. With a small portfolio, one or two of these can make a career." They sure seemed to work for him.

But Lynch also keeps an eye on price and he is most interested in stocks with P/E ratios lower than their growth rates. If a company grows at 20% a year, then Lynch would only be interested if it traded at a P/E ratio of less than 20. Similarly, he would only buy a 25% grower if it went for less than a P/E ratio of 25 — hopefully, much less.

Because Lynch likes small companies with room to grow, we began by narrowing our search to U.S. firms with market capitalizations between $200 million and $1 billion (all figures in U.S. dollars). Since we wanted fast growers, we demanded earnings-per-share growth of between 20% and 25% a year over the last five years. In keeping with Lynch's rule, we narrowed our list down to these fast growers that had smaller P/E ratios than their growth rates. Lynch also prefers firms with solid balance sheets, so we stuck to companies with more equity than debt. From the short list of stocks that passed all of these tests, we selected 10 of the best prospects with the lowest P/E-to-growth ratios to be Lynch's leaders.

Of course, our list would only be the first step for Lynch, who believes in exhaustively checking out any stock he buys. His first rule of investing is, "Investing is fun, exciting, and dangerous if you don't do any work." Wise investors should take heed.


Lynch's leaders

Company Industry
Price* P/E 5-yr annual EPS Growth Debt/Equity

North Pittsburgh SystemsTelecom
$25.17 11.1 24.1% 0.24
FNB UnitedRegional banks
$18.63 10.8 23.1% 0.49
United America IndemnityInsurance
$22.47 12.0 23.1% 0.24
Center Financial Corp.Savings and loans
$23.78 14.9 24.0% 0.44
Columbia Banking SystemSavings and loans
$32.01 16.1 24.1% 0.10
Credit Acceptance Corp.Credit services
$29.68 15.8 23.6% 0.81
SchawkMarketing services
$18.22 16.2 23.4% 0.53
Nara BancorpRegional banks
$18.29 14.9 20.8% 0.24
Heritage CommerceRegional banks
$23.14 16.4 21.6% 0.39
Option CareHome health care
$13.39 20.7 25.0% 0.42

Source: msn.com, Sept. 29, 2006
*In U.S. dollars

http://www.canadianbusiness.com/my_money/investing/article.jsp?content=20061128_104144_5424

Recession type scare causes stocks to be sold down

I wrote:

"Only a recession type scare can cause stocks to be sold per share below asset values. This stock is an easy 10 bagger if you hold long enough for the next upturn in the economy."


http://caps.fool.com/Blogs/ViewPost.aspx?bpid=203897&t=01007468826027738866

Look before leaping into small stocks

10/29/99- Updated 02:09 PM ET


Look before leaping into small stocks

By John Waggoner, USA TODAY

Your neighbors are all buying stocks. So are your co-workers. Heck, the kids down the street are investing in Lemonadestand.com. You? You're sensible and have most of your money in mutual funds. But you have a little money put aside, and you want to try picking some stocks, too.

The operative words here are "a little" money. You want to spend maybe $2,500, preferably less. If you're buying in multiples of 100 shares - which can save you money on commissions - you're talking about stocks that cost less than $25 a share.

Evaluating such inexpensive stocks isn't as easy as evaluating a large stock like Intel. But it's not that much harder - and it can be rewarding.

Low for a reason

Most investors dream of buying a stock for $1 that turns into a 10-bagger - slang for a stock that gains 1,000%. But don't go that low - stocks priced below $5 a share are considered "penny stocks," and they can be dangerous. "When you get below $5 a share, the stinkers outnumber the 10-baggers," says Joel Tillinghast, manager of Fidelity Low-Priced Stock Fund.

Even stocks that sell from $5 to $20 need to be looked at closely. A $5 stock isn't low-priced by accident, says Robert Kern, manager of Fremont U.S. Micro-cap Fund. "It's that price for a reason."

And that reason is rarely a good one. In the best case, the company missed its earnings estimates for a quarter or two or is in an industry that Wall Street currently shuns. In the worst case, the company is shuffling off to oblivion. "You want to make sure you don't have complete wipe-out risk," Fidelity's Tillinghast says.

Check the numbers

So look for a strong balance sheet. Get the company's annual report and its most recent quarterly reports, either through a stockbroker or find them at the Securities and Exchange Commission's Web site, www.sec.gov.

Your first question: If sales take a serious downturn, does this company have enough money to survive the next 12 months? To get the answer, go to the balance sheet and find:

Current liabilities. This is the company's debt due within 12 months.

Current assets. This is the company's accounts receivable, cash, marketable securities and inventory - items that could be used to pay off current liabilities in a pinch.

Dividing current assets by current liabilities gives you a company's current ratio. You want this to be higher than 1, and preferably much higher. For a more conservative number, called the quick ratio, subtract inventory from current assets. Inventory can be tough to sell in a downturn.

You also should get an idea of the company's total debt vs. its total assets. In general, the less debt the better. How much is too much? It depends on the industry, Tillinghast says.

"Financial companies can support debt levels that would be terrifying to industrial companies."

Next question: Does this company actually make money? For that, look at earnings per share. Tillinghast likes to look for annual earnings-per-share growth of 10% or better. "If it's not 10% or more, I'll look for something better," he says.

And these are just starting points. You should be thoroughly familiar with the company and its fundamentals before you invest.

Different styles

Clearly, it's not easy to find a $10 stock that has no debt and 10% annual earnings growth. In most cases, that's because the company has stumbled recently. You have to figure out why the company's price might rise.

Different managers use different techniques. John Rogers, manager of the Ariel Fund, looks for stocks that are simply out of favor and should rebound. For example, HCC Insurance earned $1.57 a share the past 12 months. Like most property/casualty companies, it got clobbered this fall during hurricane season.

Analysts expect the company to earn $1.20 a share this year, which is short of expectations. But the stock's price is down more than 55% from its July 1999 high, while earnings are expected to be down only 24%. So Rogers figures it's been punished enough.

Erin Piner, manager of PBHG Limited Fund, looks for stocks with strong growth in earnings or sales. Her favorite low-priced stock, Hall Kinion & Associates, supplies staffing for Internet sites. Earnings have risen 58%, from 12 cents a share to 19 cents, and revenue is rising, too. "It's a low-priced way to play the build-out of the Internet," she says.

Most low-priced stocks are small-company stocks, and small-company stocks have been mostly ignored for years. So many of them are historically cheap. "I've never seen anything like it in the past 17 years," Rogers says.

More time and effort

Cheap or not, investing in individual stocks takes more time and effort than investing in mutual funds. Small-company stocks are often traded infrequently, which means you may have trouble selling for the last price you've seen quoted. You're also taking on more risk: There's always the chance a stock price can go to zero.

The stock picks in the chart are by some of the best small-stock fund managers in the business. But these are just starting points, and you need to investigate the stocks carefully. Otherwise, your tuition to Stockpicking University could be costly indeed. If this all seems like too much work, consider investing in a good small-cap stock fund instead.

Fishing for low-priced stocks

Finding small stocks can be tricky. Here, five pros offer some of their favorites. P-E, or price-to-earnings ratio, is a stock's price divides by its earnings per share. Higher P-Es generally show investors are willing to spend more, in the expectation of higher rewards.

http://www.usatoday.com/money/wealth/making/mmw182.htm

10 bagger over 5 years

Santa, let the Sensex hit 15000

Larissa Fernand December 23, 2005


Dear Santa

When I asked my friends what features on their Christmas wish list, I mourned their lack of imagination and creativity.

I mean, why would you ask for a perfume bottle or a pair of Levi's? Can't you go out and get one yourself?

Since you choose to make an appearance just once a year with a promise to make wishes come true, I have decided to make the most of it.

So here is my wish list for this Christmas.

Wish 1: Can you make this bull run last for at least five years?

Now, don't get me wrong. I am not for a moment suggesting that you keep the Sensex at 9,000-odd levels, with a gradual rise now and then. Can you push it to at least 15,000?

Over five years, this should not be too difficult.

All you have to do is let the Foreign Institutional Investors keep pouring money into this country. The Americans and the British were the first entrants, followed by the Germans. The Japanese are the latest. So you still have a large part of the globe to work with.

And yes, don't forget the non-resident Indian population abroad. In case you haven't noticed, they are loaded.

Simultaneously, you can work at keeping interest rates in the US really low. This will ensure that none of the above pull out their money and run to greener pastures for better returns (isn't everyone money crazy!).

Of course, there will other loose ends that have to be tied, but nothing that your ingenuity cannot overcome.

Is this bull run over?
Wish 2: Can you name the most lucrative stocks to invest in?

Now, what is the point of a bull run if I have not invested in the galloping stocks? So how about giving me the names of five 10-baggers?

You know what a 10-bagger is, don't you? Let me explain just to make sure we are both referring to the same thing. Ten baggers are stocks that have increased 10 times in value from the price at which I purchased them.

And yes, I am not looking at them turning into 10 baggers for my grandchildren. I am talking about the next five years.

Now, in case that is a bit too demanding, here is what I suggest. Why don't you orchestrate a stock market correction?

Let the Sensex fall precipitously by around 20%. At that time, I will pick up the five stocks you recommend since their prices would have fallen to dirt cheap levels. Once I have done that, the bulls can start galloping again and the bears and can hibernate for the next five years.

Come Christmas 2010, I will sell the shares, smile and pat myself on the back.

After that, the stock market can shut down for all I care.

Wish 3: Please give me some money!

Be reasonable. What good is a bull run going to do me, even if I have a list of the five best stocks, if I have no money to invest in the stock market?

How about a gift from a benign relative? This one is tough. You will have to make them benign to start with.

Better still, why not just convince my boss to give me a bonus? A million rupees should be fine.

Investing that and getting 10 times that amount in five years is perfect. If you do the math, you will realise that I am far from greedy. Investing a million and getting 10 times that amount would leave me with 10 million (Rs 1 crore).

Asking for a crore is really not too much.

Don't let the festive season empty your wallet
Wish 4: And yes, throw in a gift card

Alright, here's the last one.

I know a gift card sounds weird. But look at it practically. What I am asking for will materialise only after five years. What about now?

Just like my friends asked for perfumes and jeans, I guess the mundane must be given some amount of attention.

Now I am not asking for a gift certificate. Those are so limiting. You can only use them at a particular store. I would like a gift card -- the ones that work like pre-paid debit cards and are acceptable at all merchant establishments.

Don't sigh, it's very simple.

All you have to do is approach a bank that offers such cards (you can get your elves to do the groundwork). Kotak Mahindra Bank and IDBI Bank is where you can start. Pay the amount and you will get a card worth that much, which you can gift to me.

The bank would have tied up with either Visa or MasterCard and the person getting the card (in this case, me) can use it just like a debit card. As I spend, the amount gets debited.

The maximum limit of around Rs 25,000 would suit me fine.

Want a gift card?
And yes dear Santa, in case you feeling exhausted after reading this, I have a promise to make.

If you do give me all that is on this list, you have my word that I shall not bother you or ask for anything for the next five years.

Oops, I almost forgot!

Merry Christmas to you too!

http://www.rediff.com/getahead/2005/dec/23santa.htm

How to Buy Cheap Stocks

How to Buy Cheap Stocks

The name of cheap stocks might cause some confusion. The common understanding of cheap stocks is of little help to boost the assets of an investor’s portfolio. Successful cheap stock trading has nothing to do with blindly buying any stock just because of its low share price. The key of cheap stock trade is to find the undervalued stocks with promising potentials.

Peter Lynch – Master of Cheap Stock Trading

Peter Lynch is considered to be the best fund manager in the world. Under his management, the assets of Magellan Fund had increased from $18 million to $14 billion in thirteen years (1977 – 1990). Lynch’s investment philosophy is quite simple and straight forward. He believes in “Invest in what you know”, which echoes with what Warren Buffett preaches and practices “Never invest in a business you cannot understand”.

In One Up on Wall Street and Beating the Street, Lynch revealed the secret of his super performance is largely due to a series of successful cheap stock trading. Lynch coined an investment term called “10-bagger”, which refers to a ten fold return of the initial investment. Lynch had found more than a hundred “10-bagger” stocks during his career, just to name a few, Fannie Mae, General Electric, Ford Motor, Dunkin’ Donuts, Taco Bell, and Philip Morris International.

Normal investors would brag a lot if they could lay their hands on one or two of “10-bagger”, while many would never have this kind of experience in their lives. The fact that Lynch can find more than a hundred of them makes him a live legend of cheap stock trading.

Cheap Stock Trading Example with Forty-fold Return

While Lynch reigned as a fund manger, the market never ends to produce “10-bagger” stocks. Sina Corp. (SINA) is an excellent example after 2000. During the debacle of dot-com frenzy, the share price of SINA crashed from its all-time high $47.87 down to $1.07 in less than one and half year (May, 2000 – Sep, 2001), which qualified it as a cheap penny stock. Since SINA is a leading information service provider in China, during the next two and half years, SINA made a round trip back to $47.69 by Jan, 2004. For shrew investors, SINA would be a handsomely “forty bagger”, and multiply their investment portfolios many times in less than three years.

A thorough understanding of principles of value investing and Peter Lynch’s investment philosophy is indispensable to buy cheap stock successfully. For investors who rush to search for the next “10-bagger” best cheap stock, they might find their cheap stock picks aren’t cheap at all. It takes time and great efforts to buy cheap stock effectively. Be well prepared and do your homework, you might be able to add the next good cheap stock to your investment portfolio.

http://hubpages.com/hub/How-to-Buy-Cheap-Stocks