Barron's recently published a breakdown of the best sectors to look for stocks that will increase tenfold in price -- or ten-baggers -- and technology led the way.
New research takes that a step further and identifies five companies with potential to produce those returns.
But first, let's start with a primer on ten-baggers.
Theoretically, a stock could rise tenfold over years and years, making the annualized return nothing special. Ten-baggers that happen over a period of just five years, though, return 58% annually. And the10-year time frame implies a still-high 26% annual return.
Analysts at Alliance Bernstein have been researching how to find these stocks, and found about 48% of the 175 instances of five-year ten-baggers since 1980 are in tech.
Shares of these tech firms achieve rapid growth through innovations that disrupt traditional ways of doing things. They take market share from the traditional providers of goods and services, bringing about high sales growth, which eventually creates large profits.
But just looking in the technology sector won't do the trick.
Within tech, these five names not only have solid future profit growth prospects, but they historically trade at valuations that are too cheap at the starting point of their tenfold returns, according to Alliance Bernstein. On average, the starting forward price/earnings multiple is between 14 and 17 times, fairly close to a long-term average for the S&P 500's aggregate multiple of about 15 times. That means these stocks are initially undervalued, given their growth.
They are also profitable to begin with. More than 80% of them have been profitable, rather than being money-losing companies that are investing heavily to pump sales growth ever higher with minimal regard for earnings. Those companies sometimes must raise money to finance their investments, while profitable companies are more self-funded.
Here are a few candidates to be ten-baggers, as screened by Alliance Bernstein:
Electronic Arts (ticker: EA) currently trades at just under 17 times expected earnings per share for the next year. It is highly profitable, with analysts expecting its operating profit to come in at about $2.5 billion this year, for a margin about 32%, according to FactSet.
On Semiconductor (ON) trades at just under 16 times earnings. Analysts expect an operating profit this year of about $2.8 billion, for a margin of almost 34%.
DXC Technology (DXC) trades at just under 7 times, with analysts looking for this year's operating profit to come in at $1.2 billion, for a margin of about 8%.
Synaptics (SYNA) trades at about 10 times earnings. Analysts forecast this year's operating profit to hit $590 million, for a 36% margin. Barron's recommended the stock in early February of this year, arguing that the company can grow profit for years to come, having invested in areas such as the internet of things. Since we published that article, the stock has dropped 53%.
Juniper Networks (JNPR) trades at 14 times earnings. Analysts are looking for an operating profit this year of $825 million, for an almost 16% margin.
None of this means these stocks will all be ten-baggers in short order, just that they are more likely to produce that return versus the average stock. Maybe a couple of them will turn into big winners.
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