Investing may not be everybody’s idea of excitement, but when I read Peter Lynch’s One up on Wall Street a big light came on for me right at the start. At the end of the introduction to the millennium edition, Lynch lists the returns on a $10,000 investment in various stocks covering the 10-year period from 1989-1999. Dell Inc. (NASDAQ:DELL) returned $8.9 million. In Lynch terminology an investment that doubles is a 2-bagger. That makes Dell Inc. (NASDAQ:DELL) an 890-bagger.
A single investment like this will change your life. And I call that exciting.
Of course, for every investor who bought Dell, there will be many more that didn’t make anything like that sort of return, and a fair few who lost the whole $10,000 (by comparison, $10,000 invested in Dell in 1999 would be worth only $2,800 today). So, is investing like buying a lottery ticket, or are there steps that we can take to shorten the odds in our quest to find that elusive 100-bagger?
Let’s take a look at some companies with the ability to grow quickly, getting popular coverage on the Fool services.
LinkedIn Corp (NYSE:LNKD) is a business with a lot of fans. LinkedIn Corp (NYSE:LNKD) had revenue of $243 million in 2010, $522 million in 2011, and reported revenue of $972 million in 2012. Is this a potential 100-bagger?
Mark Mahaney of Citigroup has estimated the size of the online jobs recruitment market to be $3 billion. LinkedIn gets most of its revenue from online recruitment, and it is fast eating up most of the apparent, available market. The market is likely to expand as online recruitment displaces traditional recruitment methods. And LinkedIn can build on its other revenue sources.
LinkedIn’s current market capitalization is $19 billion. For a 100-bagger this needs to increase to $1,900 billion. For simplicity, let’s use some round numbers and assume net profit margin of 10% and a P/E of 10. That would require revenues of $1,900 billion. Given that today’s total worldwide recruitment market is estimated at just $369 billion, this is clearly unrealistic. LinkedIn may well be a nice 5-bagger, or perhaps a little more. But a 100-bagger? No way.
How about another hot, rapidly expanding company – Tesla Motors Inc (NASDAQ:TSLA). In the final quarter last year, Tesla Motors Inc (NASDAQ:TSLA) improved revenues by 500% over the previous quarter by building 500 cars. This year the company expects to produce 20,000 cars and recently announced guidance that it will meet production targets and reach profitability in the first quarter.
Tesla Motors Inc (NASDAQ:TSLA)’s market capitalization is currently $4.8 billion, so we need it to become $480 billion for a 100-bagger. Again, keeping things simple with a net margin of 10% and P/E of 10, we need to see revenues of $480 billion. That would translate to sales of 5.6 million Model S cars at $85,000.
As Elon Musk estimates worldwide demand at 40,000 units this is clearly unachievable with the present model. With a future Gen III low-cost model in the pipeline we may see better revenues through high volumes, but we would still need a turnover that is more than three times that of Ford Motor Company (NYSE:F). Realistically, for our 100-bagger, we need to look elsewhere.
New disruptive, technology may provide the answer – Dell’s rise was propelled by the widespread adoption of PCs. 3D Systems Corporation (NYSE:DDD) is a market leader in 3D printing. Its market capitalization of $2.9 billion would need to grow to $290 billion for a 100-bagger. Keeping to our simple formula of a 10% margin and a P/E of 10, that would require revenues of $290 billion. Global Industry Analysts predict a worldwide market of just $2.9 billion by 2013. Again, 100-bagger status looks unachievable.
However, in a fast developing market based upon new technology predictions are often hugely inaccurate and too pessimistic. (“I think there is a world market for maybe 5 computers.” — Thomas Watson, IBM founder, 1943.) So maybe there is a very slim outside chance for 3D Systems Corporation (NYSE:DDD) to become a 100-bagger. But can we find better odds than this?
Often, it is a company’s ability to see a way to capitalize on wider changes that leads to huge growth. Dell didn’t invent the PC, they had the foresight to see a fast growing market and exploit it.
One major change in recent years has been the discovery of huge reserves of shale gas. One company set to exploit a potential major change in energy usage is Westport Innovations Inc. (USA) (NASDAQ:WPRT). Westport manufactures specialized parts that enable diesel burning engines to be replaced by engines using natural gas. Westport Innovations Inc. (USA) (NASDAQ:WPRT) has a market capitalization of $1.6 billion, and following our standard margin and P/E assumptions, would need to increase both its market cap and revenues to $160 billion to be a 100-bagger.
Westport recorded revenues of $155 million with 1,956 units shipped in 2012. On a pro-rata basis, a $160 billion turnover would require sales of some 2 million units. According to Power Systems Research, the world market for diesel engine vehicles (excluding cars) was 12 million vehicles in 2012. With a 16% market share, Westport would make the 2 million target.
We appear to be in the right ballpark. I think some of these numbers need some work. For example, the revenue per unit using a pro-rata approach seems far too high. But the purpose of this broad-brush approach is not to produce a highly accurate answer. Instead we are looking to see whether we have any chance of coming close to our objective. As far as accuracy goes, by assuming, say a P/E of 20 and a margin of 20% we could reduce our required turnover by a factor of 4.
So, yes, Westport is a candidate for a 100-bagger stock. Many things would need to be just right for this to be the case. But the best thing we can do as investors is to identify stocks that have a possibility of succeeding and add a few of these to our portfolio.
Please remember that any stock with a high gain potential is also likely to have a significant potential for a total loss. All of the stocks discussed have a high level of short interest. (And please don’t dismiss any because they are not potential 100-baggers; 5-bagger is very good!)
Westport is my suggestion, but any well run business with a small share of a large potential market can be a 100-bagger. If you have time, seek out Lynch’s list – it throws up a few surprises.
If you have a low-risk tolerance, seeking the 100-bagger may not be for you as a few painful losses may be unavoidable.
But if you are up for the hunt, finding a small place in your portfolio for Westport may be a good place to start.
Ian Richards holds stocks in LNKD, TSLA, DDD and WPRT. Ian also holds long calls in TSLA and WPRT and has sold puts in TSLA and WPRT. The Motley Fool recommends 3D Systems, LinkedIn, Tesla Motors, and Westport Innovations. The Motley Fool owns shares of 3D Systems, LinkedIn, Tesla Motors, and Westport Innovations and has the following options: Short Jan 2014 $36 Calls on 3D Systems and Short Jan 2014 $20 Puts on 3D Systems.
