Landing a 10-bagger is the dream for many investors. The phrase can be used to describe stock market investments that have increased 10-fold in value and investments with the potential to increase 10-fold. The term is often used to describe shares that have significant growth prospects.
Where does the phrase come from?
Fund manager Peter Lynch coined the phrase '10-bagger' in his book One Up On Wall Street. Lynch was a baseball fan, and 'bag' is another word for base. A 10-bagger represents the equivalent of an exceptionally successful baseball play.
Lynch uncovered a number of 10-baggers in his career. He looked for shares with:
- high but sustainable growth in earnings per share (EPS); and
- a price-to-earnings (P/E) ratio below the industry average.
Lynch's fund returned an average 29.2% per year over the 13 years he managed it.
Memorable 10-baggers in Australia
There have been numerous examples of 10-baggers on the ASX in recent years. Afterpay — now Block Inc (ASX: SQ2) — was trading at less than $10 a share during the COVID-19 crash in March 2020. Less than a year later, it hit highs of above $150, driven by strong uptake of buy now, pay later services.
Many of the shares that took a beating when COVID-19 hit subsequently staged a strong comeback. Corporate Travel Management Ltd (ASX: CTD) shares fell to $5.45 as the pandemic impacts took hold but had recovered to above $24 by early April 2022. For ASX investors who bought in at the bottom, this represents an almost five-fold return in just two years.
Other ASX shares have been more of a slow burn but have become 10-baggers over time. Fortescue Metals Group Limited (ASX: FMG) started life as a penny stock, trading below $1 in 2006. In March 2023, it was trading at around $21 a share.
CSL Limited (ASX: CSL) shares were swapping hands for about $13 in 2006, but in early March 2023, they were worth more than $285.
Achieving a 10-fold (or 20-fold) return is not an overnight endeavour. It can take some companies years — and often decades — to reach their full potential.
What to look for when hunting 10-baggers
There are a number of factors that can influence the likelihood of a particular share becoming a 10-bagger. These include:
New products or technology: Early investors can reap significant rewards if and when the product/technology takes off. But not all products or technologies will. Those that do tend to be useful to people, have a large potential user base, and be readily adoptable. They must meet an identifiable need and be reliably produced and marketed.
Growing industries: 10-baggers are more likely to be found in growing industries rather than mature industries with well-established players. This is because growing industries provide enhanced growth prospects.
Social trends: Trends and changes in society can have a huge impact on the performance of companies. Those that benefit from social change can receive significant tailwinds that flow through to increased earnings, profits, and share prices.
Regulatory considerations: Government regulations can have a significant impact on share prices. Changes in regulations can create as well as destroy value-making opportunities. A supportive regulatory environment can make a significant difference to the earnings and growth potential of companies.
Investor awareness: Many people believe that identifying a 10-bagger depends on finding shares that few investors know of. While this can be true, it is certainly not always the case. The fact that a particular share is currently flying 'under the radar' is no guarantee of its future performance.
While each of these factors can play a role, none guarantees a particular share will become a 10-bagger. Chasing 10-baggers can be an attractive goal, but it is more important to do your research and understand the companies you invest in.
Provided you do this and invest for the long term, you should do reasonably well, even if you don't bag a 10-bagger.
What happens when the party ends?
Share prices can be cyclical, and what goes up can come down. The Afterpay share price eventually retraced its former progress, falling to about $66 in January 2022 before its takeover by Block Inc (NYSE: SQ). Block Inc CDI (ASX: SQ2) shares are traded on the Australian exchange.
Remember that share prices are impacted by an extensive range of influences, from the broader economy to company-specific factors. There is no guarantee that conditions contributing to a share price rise will continue.
This is why it is important to keep monitoring the performance of your portfolio. Some investors may choose to exit companies where the share price has increased significantly, locking in profits.
Others may hold on, especially if they believe further growth is possible. What you choose to do depends on your individual circumstances and beliefs.