What Is a Tenbagger?
While tenbagger can describe any investment that appreciates or has the potential to increase tenfold, it is usually used to describe stocks with explosive growth prospects. Lynch coined the term because he is an avid baseball fan, and “bag” is a colloquial term for a base. Thus “tenbagger” represents two home runs and a double or the stock equivalent of a hugely successful baseball play.
- A tenbagger is Peter Lynch's term for an investment that returns 10 times its initial purchase price.
- Tenbaggers start out as stocks that have strong earnings growth but still trade at reasonable valuations.
- Finding tenbaggers requires learning about the industry. A growing industry will have more potential tenbaggers than a mature industry with established players.
Peter Lynch identified and invested in numerous tenbaggers when he was the manager of the Fidelity Magellan Fund from 1977 to 1990. As a result, the Magellan Fund grew from $18 million in assets when Lynch took it over to $14 billion when he left in 1990. Over this period, Lynch achieved a 29.2% average annual rate of return, which meant that $1,000 invested when Lynch started managing the fund in 1977 would have grown to $28,000 by the time he left it in 1990.
Lynch preferred stocks that had a price-to-earnings (PE) ratio below the industry mean and less than its five-year average. He also looked for stocks where the five-year growth rate in operating earnings per share (EPS) was high but below 50%. His reasoning was that such earnings growth rates were not only unsustainable, but companies growing at this pace would attract competition.
In a PBS interview in 1996, Lynch cited Wal-Mart as an example of a tenbagger that investors had plenty of time to buy. He said that investors who had purchased Wal-Mart 10 years after it went public in 1970 would have still made 30 times their money.
How to Discover a Tenbagger
When searching for the next tenbagger, investors might consider looking for the following types of situations:
- Novel technology: Technology is what drives the stock market. Early investors in leading high-tech companies have made huge amounts of money. However, not all types of technology fit the bill. Investment-worthy technology needs to have a huge potential user base, be easily adaptable by the masses, and be something that people use.
- Societal mega-trends: Following societal megatrends is a key element of many tenbagger stocks. The more people are adopting a novel technology, the more it should matter to potential investors.
- Sovereign action: Sovereign or government action can have a huge effect on stock prices. Regulations and new laws can create and destroy markets and even trends. It is critical that a potential tenbagger be supported by, or at least not be impeded by, government regulations.
- New products: Just like new technologies, companies with new products that fit into megatrends have a strong chance to become tenbaggers. Look for novel products that fill a need created by companies with the ability to produce and market.
- Investor interest: Many people seem to think it's best to locate stocks that no one else knows about. While finding a quality hidden gem is possible, it's not a reliable indicator of potential tenbagger performance.
Although tenbaggers are an attractive goal for investors to chase, perhaps the most important pieces of advice Peter Lynch has given to investors is to invest in what you know, invest for the long run, and do your homework. If you can do that consistently, you still may not land a tenbagger, but you'll be better off than most.