Navigating the Market Maze: Strategies to spot stocks with explosive growth potential
Maksym Koretskiy, investor, entrepreneur and founder of Blackshield Capital Group, asks how you find an asset with a tenfold growth potential in a time of uncertainty and looks for answers in history.
This article is co-authored with Ilya Kyslytskyi, Head of the Analytical Department of Blackshield Capital Group.
There is not a single investor who would not like to learn how to correctly identify multi-baggers – stocks of companies that can grow several times (or even dozens of times) in a relatively short period.
This is especially relevant now, during a period of mixed sentiments in the markets. On one hand, investors need hope; on the other hand, they need an understanding that it might be unnecessary to hold onto certain companies if they do not meet the criteria for a promising investment in the long run. Many investors have stagnant positions in some stocks. What can reassure them is the fact that even the best companies have gone through challenging periods.
Сompanies have experienced economic crises and falling GDP and felt the pressures of geopolitical risks and cyclical downturns throughout their history. And yet, some bring investors thousands of percent growth over 5-10 years, while others fall with no chance of recovery.
An analysis of the last 50 years enables us to highlight the common features of companies with great potential. Exactly as much as their exact opposite.
Discovering hidden gems
Over the past 50 years, there have been 175 cases when companies grow tenfold (or more) in stock (including reinvested dividends) in five years or less. Almost half of them are in the technology sector. The consumer goods sector came second (17%), followed by the healthcare sector (9%). What is interesting is that we are not even talking about Microsoft or Google.
Leaders of recurring multiple increases are Nvidia (NVDA – graphics processors and computing systems), Charles Schwab (SCHW – a full range of brokerage, banking, and asset management services), and Home Depot (HD – home improvement retailing).
SCHW has grown by a factor of 10 5 times, NVDA – by 4, and HD – by 3. NVDA has cumulatively grown by over 97,000% since 1999, and SCHW – by 15,000% since the late 1980s.
If we take a longer period, the technology sector is losing the lead on a net basis. Only one sector shows a truly long-lasting dynamic growth – the financial sector, which has about 10 companies that have shown a 10-fold growth over the entire 50-year period. Companies in the sector include both classic banks (such as J.P. Morgan and Wells Fargo) and transactional financial technology infrastructure (such as Visa and Mastercard).
From bursting bubbles to new heights
For instance, the “ tailwind period” for technology companies was the dot-com boom from the mid-1990s to 2000. Thanks to a surge in demand and interest in the technology, as well as widespread media coverage, they got a boost of multiple growth.
The late 1990s and early 2000s after the “Tech Bubble” were the golden age of the financial sector. For example, Citi Bank twice showed short-term growth of 300% and 500% without visible correction from 1995 to 2000.
After the financial crisis of 2008-2009, the beneficiaries of the money industry were not only the traditional banks and financial institutions but also Visa, Paypal, Square, and many young companies that skilfully balance finance and technology (however not all of them are publicly traded at the moment – such as Klarna, Stripe, Plaid, Chime and Revolut).
In the 1999-2000s, the boom in the availability of Internet technology and the stock market led to everything being bought regardless of the quality of the business or what it did. When the backlash started and things started to fall apart, companies were divided into two large groups – those that fell 90% and those that fell “down” and went bankrupt.
You can bet on the “right” industry and get the timing right, but when it comes to long-term investing, the more significant individual ability or inability of a company to ride out the storm and recover comes to the fore.
Lessons from companies that transformed their fate
Over the last 50 years, companies have fallen by 50% or more over 1,000 times! And some companies, about 350 of them, have gone down several times!
One well-known example is AIG Insurance Group (which has fallen in two rounds, 58%, and 95%). More recent history – American Airlines, which fell by more than 90% in 2008, amid the collapse of the US economy. The pharmaceutical companies Teva Pharmaceuticals and Tenet Healthcare have fallen by 50, 70, and 90% in their history, going through not only global economic turmoil but also a series of business and competitive issues over the past 50 years.
No matter how significant the decline is, there are companies that, thanks to a timely change of strategy, have managed to virtually “rise from the ashes” – the most famous cases are Apple and AMD, which have both shown thousands of percent growth from their lows.
Leaders of multiple growth may experience signs of correction. However, the recurring 10x growth over the decades suggests that businesses are capable of moving beyond becoming not only leaders in a particular industry, but finding new niches and areas of development as well.
Lessons from companies that couldn’t weather the storm
As for the collapsing companies, they share a systemic inability to show growth: their median revenue growth rate is less than 9% and their CAGR (compound annual growth rate) is less than 1%, usually due to the business margins collapse.
There are two composite portraits of loss-prone companies:
- A young, innovative company that is lucky with its IPO date – it grows in line with the market, uses modern terms in describing the business, and does active marketing. However, in times of crisis, it loses the ability to sustain business and becomes significantly cheaper. The result is either bankruptcy or a takeover by a stronger player. For example, FreeMarkets, TheGlobe and Pets.com.
- Mature companies that are losing the market. These are usually large companies with an average capitalisation of around $30bn (£23.2bn) and often generating profits. At some point, there is a structural shift in the economy – the regulatory environment, economic conditions change, or several innovative competitors emerge. The company feels comfortable, stops changing and adapting, makes managerial mistakes, and loses the market. For example, Nokia has fallen by 85% twice since 2000 and has lost the mobile phone market through management mistakes.
Over 80% of declining companies initially showed profitability with median operating margins slightly above the market, gradually demonstrating a systemic inability to generate revenue and maintain margin levels. Meanwhile, some 60% of companies continued to decline after an initial drop of 50%.
For example, Unisys boomed twice in its history, in the 1980s and the late 1990s. It successfully competed with IBM in several industries and tried its hand at cloud architecture and consultancy, but each time it generated poor revenue and strategically “missed the mark”. It still trades today, but with a capitalisation of $300m (£2317m), it is a small niche business.
Maksym Koretskiy is CEO of Blackshield Capital, a group of investment companies with offices in Kyiv, London, Zurich, and Dubai. He’s a financier and investor with 20+ years of experience.