Although it’s easy to forget sometimes, a share is not a lottery ticket… it’s part-ownership of a business.  — Peter Lynch

Wouldn’t it be nice to have a sixth sense to invest in the next 10-bagger stock? In the past 30 years alone, we have witnessed birth and rise of many 10-bagger stocks such as Microsoft, Cisco, Dell, Qualcom, and Apple.

The term 10-bagger was coined by Peter Lynch in his best-selling book ‘One Up On the Wall Street”. These are the stocks that go up 10 fold in value from the purchase price.

These stocks are like supernovas  in the Milky way. Their meteoric rise and spectacular return can make you a millionaire, if you are lucky to find one of these stellar investments in your life time.

The easiest way to build wealth is to  have the foresight and courage to invest in one of these revolutionary companies for a decade or longer while its business model transforms the world.

If you had invested just $5,000 in Microsoft stock  in 1986, it would have been worth over $1.7 million now. If you were lucky to sell it at its peak in year 2000, you would have made over $3.4 million from your humble investment of $5,000. That’s the power of finding and holding on to a revolutionary stock.

Let’s face it, it’s not as easy as it sounds. It’s clear from the fact that most people get mediocre return from their investments. As an astute student of life, I embarked on finding a recipe for the next ten-bagger.

We can’t profit from the supernovas of the past, but we can use our analytical mind to find common factors among these outstanding investments to look for the next Apple to profit from.

William O’Neil is founder of Investors Business Daily. Like a  street smart investor,  Mr. O’Neil has been a staunch believer in collecting data and finding facts instead of relying on the personal opinions or feelings of the Wall Street analysts.

Based on the research of IBD, you can use these rules to find the next 10-bagger stock  because history always repeats itself.

1.  Find a revolutionary company with exceptional business model.

The touchstone of any revolutionary company is its power to change the world by offering a revolutionary product or service. These companies enjoy unique competitive advantage due to their ability to create a new niche. Microsoft was a tiny company in early 80’s, but it became a game changer in the personal computing world when IBM licensed the Windows operating system. Instead of selling Windows operating system to IBM, Bill Gates struck an exclusive licensing deal to become the richest person on the planet. Those who invested even a paltry $5000 would have been millionaires by now.

Cisco systems revolutionized networking by offering routers in early 90’s right before the Internet boom. It’s stock zoomed up 75,000% in that decade.

2.  EPS(earning per share) should grow at 25% or more.

The bye product of offering revolutionary product is the revenue and sales growth. It’s important that EPS grows at 25% clip or more compare to the same quarter a year ago.  All the great stocks show EPS growth consistently for many years to reward their investors.

3. Sales should grow at 25% or more.

Both earnings and sales normally grow in tandem.  Apple is a classic example in the recent time. It’s EPS and sales have grown by more than 25% since 2007. Obviously, the stock price reflects that growth since 2007.

4.  Return on Equity(ROE) should be 20% or higher.

Return on Equity shows how effectively a company is utilizing its capital to increase its top line growth. This is one of  the crucial factors for a young company to show that it can invest capital wisely during its growth years.  It also demonstrates quality of the executive leadership.

5. The stock should have institutional sponsors.

It’s important for any stock to have institutional sponsors like mutual funds, insurance companies and banks. These sponsors have financial power to accumulate large number of shares; it is inevitable for the stock to advance due to the purchasing power of these professional investors.

Parting Thoughts:

From the Industrial revolution to the Internet revolution, scores of companies led these times to change our world.  You really don’t need the genius mind of Steve Jobs or Jeff Bezos to build wealth. You simply need a street smart attitude to invest early on in these revolutionary companies to become rich. Do you agree?

 Elsewhere:

Start Your Investment Portfolio with One Share of a Stock @ Your Smart Money Moves

Thoughts About Investing @ Modest Money

Dividend Growth Investing @ JlCollinsnh

The Little Book of Big Dividends @ My Money Design

How Often Should You Re balance Your IRA And What Funds Do You Choose? @ Eyes On the Dollar

Photo: Microsoft Stock Chart