The Dow's Ten-Baggers
Many investors search for Peter Lynch's elusive "ten-bagger," a stock which will gain ten times its original value. Such ten-baggers are much more common than you might expect, especially if you have patience.
By Ethan Haskel (TMF Cormend)
November 17, 2000
Ah, the ten-bagger. It's what many investors live for.
Just what is a ten-bagger? The term, coined by Peter Lynch in One Up on Wall Street, has its origins in our national pastime, baseball. It indicates two home runs and a double, a total of ten bags crossed on the field by a batter.
In the investment world a ten-bagger is considered the ultimate home run, the grand slam. It means you've made ten times your original investment on a stock. $1,000 turns into $10,000. �$10,000 becomes $100,000. $100,000 becomes... you get the idea. Find enough of these ten-baggers over your investment career, and you're sitting pretty.
When we think ten-bagger, we usually think of high-flying Internet stocks. Or biotechnology stocks. Or some company that uses the phrase "wavelength-stabilizing modules" in its prospectus.
Ten-baggers are usually thought to be the trophies of Rule Breaker investors, those adventurous souls who risk it all in the search for investment immortality. Amazon <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> and America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> are the prototypic ten-baggers. Recently, the Rule Breaker Portfolio report has discussed the concept of "10x/5y," which is shorthand for the goal of multiplying an investment by 10 in five years.
When we think of starting a search for ten-baggers, we usually head directly for the Nasdaq stocks. But did you know that lowly Alcoa <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AA)") else Response.Write("(NYSE: AA)") end if %>, the humble aluminum company, is a ten-bagger? Or that Minnesota Manufacturing and Mining <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MMM)") else Response.Write("(NYSE: MMM)") end if %> is, too?
In fact, the stodgy Dow is just chock full of ten-baggers. You just have to be a little patient sometimes as they run the bases.
Let's look at the returns of the current Dow stocks for which price data was available for the past 20 years. Of the 30 Dow stocks, 25 had data that I considered usable. The other stocks hadn't even been around 20 years (like Home Depot <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HD)") else Response.Write("(NYSE: HD)") end if %> or Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>), or had too many corporate reshufflings and spinoffs to easily get reliable data (like AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %>). I also included three of this year's five Beating the S&P stocks for which data was available -- Fannie Mae <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FNM)") else Response.Write("(NYSE: FNM)") end if %>, Ford <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:F)") else Response.Write("(NYSE:F)") end if %>, and PepsiCo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %>.
The following chart lists the ten-baggers found among these 28 stocks, in order of diminishing returns, from November 13, 1980, until the close of trading Monday. Note that dividends are included in these returns, but these dividends are not reinvested. Furthermore, any stock spinoffs are not taken into account. If I had reinvested dividends and included spinoffs (which would be a lot more difficult to calculate), the returns would likely have been higher -- much higher in some cases. Keep in mind that any return over 1000% is a ten-bagger.
Stock ������������20 Year Return (%)
Wal-Mart �����������25074
Fannie Mae ����������8259
Intel ���������������7856
Coca Cola �����������7830
Merck* ��������������6620
Philip Morris �������4228
General Electric* ���4186
Citigroup �����������3973
Johnson & Johnson ���3860
American Express ����3675
PepsiCo �������������3392
McDonald's ����������2961
J.P. Morgan ���������2144
Walt Disney ���������1943
Ford Motor ����������1599
Procter & Gamble* ���1542
United Technologies* 1484
DuPont* �������������1273
3M* �����������������1221
Hewlett Packard �����1193
Alcoa* ��������������1070
* = Dow stock in 1980
So, out of 28 stocks, we've got 21 ten-baggers. We've even got our share of 30- and 40-baggers. And with the granddaddy of them all, Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %>, we've got a certifiable 250-bagger.
Granted, it took 20 years for some of these companies to reach ten-bagger status. That's not quite what Peter Lynch had in mind when he wrote about ferreting out small, undiscovered companies and patiently waiting for them to get discovered by the mainstream financial analysts. And although it may sound impressive, multiplying your investment tenfold after 20 years only equals a little more than a 12% compound annual return -- just slightly ahead of the market's historical return and well behind its return for the past 20 years. (The stocks listed in bold have beaten the market over the past 20 years, even without reinvesting dividends and spinoffs.)
If we had $1,000 to invest in each of these 21 stocks in 1980, we'd be sitting on a portfolio with a value of at least $974,000 right now, compared to around $540,000 for the S&P 500. But I'm not showing you these stock returns in order to impress you with the results or to suggest any kind of investing strategy -- no one could have predicted those returns 20 years ago and obviously many of those stocks ended up in the Dow (and thus ended up on this list) precisely because they had shown steady growth.
The point I'm trying to make is that most so-called "average" or "boring" Dow companies, even those that didn't beat the market, were slow and steady gainers. The slowpokes on that list above may not have been the best choices for a long-term buy and hold portfolio, but then they didn't run up to ten-bagger status in a year only to crash back to where they started within three months.
We don't need to swing for the fences all the time -- that usually leads to more strikeouts. We just need to keep banging away at those singles, year after year for decades. It's the Tony Gwynn style of investing.
A Rule Breaker goal of finding 10x/5y stocks is very enticing, but might not be appropriate for investors with less tolerance for the high risk that such investments entail. All the stocks on our Dow ten-bagger list, even humble Alcoa, meet the criteria of 10x/20y, and many have performed considerably better.
As Fools, we hope every stock in our portfolio outperforms the market, but we realize this just isn't going to happen. But even when a portfolio achieves (GASP!) merely average returns, the result can be quite satisfactory.
A single $10,000 investment in 10x/20y stocks would be worth a million dollars after 40 years. Sure, inflation will cut into the purchasing power of that million. But if we start investing when we're young and add to our investments regularly, we should easily achieve most of our financial goals -- even with "mediocre" 10x/20y stocks. Add just a hint of Foolish market-beating performance, and we're truly home free.
Beating the S&P year-to-date returns
(as of 11-16-00):
Bank One <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ONE)") else Response.Write("(NYSE: ONE)") end if %> �������� ��+8.2%
PepsiCo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> �����������+26.9%
Ford Motor Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> ������-10.2%*
Bank of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> ���-13.6%
Fannie Mae <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FNM)") else Response.Write("(NYSE: FNM)") end if %> ��������+27.7%
Beating the S&P ������������� ��+7.8%
Standard & Poor's 500 Index ����-6.6%
*Includes Visteon <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VC)") else Response.Write("(NYSE: VC)") end if %> spin-off
Compound Annual Growth Rate from 1-2-87:
Beating the S&P ������������� �+23.3%
S&P 500 ����������������� �����+16.2%
$10,000 invested on 1-2-87 now equals:
Beating the S&P ������������$181,000
S&P 500 ���������������������$79,900
