“Why don’t we start a secret blood pact with the devil to become rich and powerful, and eventually take over the world?!” said an investment geek to his friend. And that’s how InvestorGeeks.com was born. Earlier this month, Investor Geeks carried an interesting article titled “Hunting for Tenbaggers” by co-founder Chris Welch.

Ah, who wouldn’t want a tenbagger — a stock that goes up ten times it initial value? If you had $10,000 and invested it in two stocks that both became tenbaggers, you’d be a millionaire!

Welch asks and answers some basic questions:

“Question: What is the name of a stock that grows the equivalent of two tenbaggers?
Answer: A hundredbagger.

“Question: Is it possible to find such as stock?
Answer: Yes! Since [Tuesday] 7/8/2003, exactly 3 years ago today when Hansen Natural (HANS [NASDAQ]) began its meteoric rise, the stock has appreciated 9,457% in price. In other words, $10,000 invested 3 years ago would be worth $946,000 today.”

Tenbaggers, even hundredbaggers, are easy to find in retrospect. But to make money off of these stocks, you need to find them BEFORE they embark on their dizzy ascent. And to find these stocks before they run up, Welch uses an interesting screen inspired from two of his favorite books:

“One of the screeners I use frequently is based on Phil Town’s book, Rule #1. I find the results of this screener are a great list of sound companies at various stages of their growth. However, I’ve also read William O’Neil’s book, How To Make Money In Stocks, which provides alternative criteria for stock selection. So I thought it might be interesting to merge the two screens together to see what comes up.

“What I found, to my surprise, was a list of all-star companies that have been making headlines because of their excellent price performance. Some of the names on the list include Hansen Natural (HANS [NASDAQ]), Cognizant (CTSH [NASDAQ]), and Eagle Materials (EXP [NYSE]). But alas, there were no riches in these results because these famed companies had already achieved tenbagger++ status. So I thought, ‘How can I find them before they jump?’”

While analysing these tenbagger++ stocks, Welch noticed something. Nearly all of these stocks had a period of flat price performance followed by three or four years of rapid price increases. And their prices doubled atleast once every year. Welch figured if he could find companies just coming off that flat phase, he could find a tenbagger.

He says, “I put together a screen that searches for companies with valuations [market caps] between $50 million and $1 billion who have doubled in the last year but have grown less than 10x in the last 5 years. With these criteria, I’m hoping to find strong growers that haven’t peaked yet.”

Here, I have replicated Welch’s screening criteria and chosen four potential candidates:

Finding Future Tenbaggers

The rationale behind the criteria “Price/5-year low<10” and “Price/52-week low>2” is simple. When the stock’s price divided by its five-year low is less than 10, it means the current stock price is less than 10 times its five-year low.

And when the price divided by a stock’s 52-week low is greater than two, it means the current stock price is greater than two times its 52-week low.

Simply put, these two criteria ensure that the stock is trading at low enough levels but has the potential to be a tenbagger. The above screen yielded exciting results: International is a fast growing Chinese gold jeweler. TransMontaigne is a petroleum company that will soon be bought by Morgan Stanley. Game Tech, as the name suggests, makes electronic bingo machines in a booming gaming industry. OYO Geospace sells seismic instruments to the oil and gas industry.

Welch picked Advanced Environmental Recycling Technologies (AERT: NASDAQ) as his favorite stock from the screen. He even bought the stock. “Is AERT a tenbagger? I won’t know until it becomes one, but I certainly hope so. If nothing else, though I did find a growing company, with good fundamentals, that I’m sure will make me money, and that’s all I care about.”

Welch concludes by saying this: “Finding tenbaggers is not easy. It takes an insight into an industry or company that few else have, and an eye that spots it before most others do. With smarter thinking and an open mind, you can do it.”

Regards,

Sala
July 21, 2006

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