What Home-Run Stock Picks Have In Common

  • James H. Lee

Let's admit it - we all like to swing for the fences once in a while. Few things are as exciting as hitting a double, a triple, or better yet, a home run in investing.   During some years, it is harder to hit home-runs than others.  2013 was pretty amazing in this respect, this year is a little more challenging.  It takes time and practice for everyone, veterans and rookies alike.


The well-respected mutual fund giant T. Rowe Price recently did a comprehensive study of small to mid-size stocks that completely hit it out of the park - generating six-fold gains or more over a ten-year period. In other words, these stocks grew at annualized rates in excess of 20% per year.




Home-run stocks are exceptional and rare 


On average, only about 18 companies (out of over 1,000) produced six-fold returns over any given ten-year period ending between 1996 and 2013. Good stocks are hard to find, especially when the market has flat to negative performance.

"The ability to grow revenue at a double-digit pace is really, really hard to do over an extended period of time, and to be able to compound wealth at 20% or more is very rare," says Henry Ellenbogen, manager of the New Horizons Fund.


Even these amazing stocks can experience big losses 


On average, home-run stocks experienced losses averaging 27.1% at least once during their period of greatness. Investors sometimes need to be patient and able to wait through periods of disappointment.


How to find "home-run" companies 


What else do they have in common? These exceptional companies had average sales growth of 18.5%, earnings growth of 17.1% and average annual returns on invested capital (ROIC) of 18.4%.  The Association of Individual Investors (AAII) ran a search on its database using these factors and identified the following companies as having potential to be "home run" stocks within the next few years:  American Equity Investments Life (AEL), S&J Energy Services (CJES), Cirrus Logic (CRUS), EPAM Systems (EPAM), Gogo (GOGO), Grand Canyon Education (LOPE), Impax Laboratories (IPXL), Medidata Solutions (MDSO), Myriad Genetics (MYGN) NIC (EGOV), and Steven Madden (SHOO).


The first step toward finding winning stocks is knowing where to look. Most professional money managers start with some basic screening tools to find companies that fit their investments style. The research at T. Rowe Price is interesting because it shows some of the key variables that make a difference over time. Finally, AAII shows that some of these tools are available to the individual investor.


-Jim Lee, CFA, CMT, CFP®


Disclosure:  Information contained herein is for educational purposes only and is not to be considered a recommendation to buy or sell any security or investment advice. Securities listed herein are for illustrative purposes only and are not to be considered a recommendation. As of August 17, 2014, StratFI holds shares of Steven Madden (SHOO) in client accounts.