Weekly Buzz: 🚀 How to identify a multi-bagger

24 May 2024

If you think you've missed out on any one skyrocketing stock, think again. With a well-diversified portfolio, you're likely already benefiting from the market's top performers.

And there will always be new multi-baggers emerging in the markets, stocks that multiply their value several times over. If you’re curious about what sets these high-flyers apart, here are 4 common traits from a study of 446 top-performing stocks across a 10-year period.

  1. Strong growth isn’t always king. Surprisingly, rapid growth isn’t always necessary for outperformance. About 63% of the companies analysed saw less than 20% annual revenue growth over ten years, and 33% saw both their revenue and operating profits grow below 20% annually.
  2. Margins matter more. Margin expansion – a trend toward earning more than the firm spends – was crucial. In 2012, 48% of profitable companies had an earnings before interest and taxes (or EBIT – our Simply Finance section below breaks this down) margin of 10%. By 2021, this increased to 85% of profitable companies.
  3. Small is good. It’s much easier for a company to balloon from US$10 million to US$100 million than to leap from US$100 billion to US$1 trillion. Thanks to smaller numbers and the room for bigger growth, a hefty 63% of the market’s big winners were ‘nano caps’, companies with less than US$50 million in market capitalisation.
  4. Tech, healthcare, and materials are where the action is. These industries punched above their weight compared to their public market presence.

The most important trait: Diversification

Past performance doesn’t indicate future returns. Sure, the US and tech have been the best-performing country and sector lately, but historically, winners have been more scattered.

If you’d clung only to tech, healthcare, and consumer companies, you’d have waved goodbye to 40% of the other winners in the materials and industrials sectors. Similarly, limiting your investments to developed markets would have overlooked 37% of the world’s outperformers.

The key here is simple: diversification. Instead of trying to find the needle in the haystack, just buy the haystack. This lets you capture the gains of high-performing stocks without limiting your investments. A good place to start might be our General Investing portfolios – they’re a mix of assets diversified across regions and sectors, managed automatically for you.

📰 In Other News: China’s industrial sector marches on

While China’s retail sales fell short of analysts’ expectations, the country’s industrial sector had plenty to brag about.

China’s retail sales were 2.3% higher this April than last, shy of the 3.8% that economists expected. That’s not surprising: the country’s flailing property market has shaken homeowners’ financial confidence, so folk are taking each purchase seriously.

That said, China’s industrial sector – think manufacturing, mining, and utilities – managed to glide past production expectations, growing 6.7% in April from a year ago, beating expectations. The country’s reputation as “the world’s factory” seems far from lost.

To prop up its property market, China’s finance ministry is selling one trillion yuan (US$138 billion) of bonds. A sale of that size has only happened three times before in the last 26 years. With a significant chunk of that cash expected to be funnelled straight into the housing sector, that could bolster homeowners’ financial confidence and encourage them to spend more.

These articles were written in collaboration with Finimize.

🎓 Simply Finance: Earnings before interest and taxes (EBIT)

Picture a lemonade stand; what it earns from each cup sold, before worrying about any bank loans or giving the taxman his share, is its earnings before interest and taxes – or EBIT for short. EBIT is a simple measure of a company's operational performance, used to strip away the complexities of finance and accounting. This makes it a useful tool for comparing firms regardless of debt levels or tax rates.

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