Here are 4 sure-fire ways to catch the next 10-bagger

You can't find explosive growth shares by measuring them the same way as established businesses. Here's a manual on what to do instead.

| More on:

Should you invest $1,000 in Etfs Morningstar Global Technology Etf right now?

Before you buy Etfs Morningstar Global Technology Etf shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Etfs Morningstar Global Technology Etf wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 30 April 2025

Man with a rocket strapped to his back on a tiny bicycle ready to take off.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A growth stock in our portfolio that multiplies 10 times in value is what we all dream of.

A rocket like that can make up for losses in other shares, plus leave plenty for you to pocket. You can own five other growth shares that are $0 losers, but you'd still have doubled your money!

But those 10-baggers, and indeed 5-baggers, are difficult to pick.

If it were easy, everyone would be doing it.

Conventional analysis just doesn't cut it for 10-baggers

"If investors cast their eyes back over the last two decades, it's obvious the stock market's massive winners and 10-baggers – the likes of Amazon.com, Inc. (NASDAQ: AMZN), Alphabet Inc (NASDAQ: GOOGL) and Afterpay Ltd (ASX: APT) – have always looked overvalued and uninvestable based on conventional valuation methods," read a memo from Ophir Asset Management.

"Many investors wielding traditional valuation tools shunned these stocks and missed out on staggering returns."

The trouble is that these future 10-baggers are usually early-stage companies. And those growth shares usually don't have enough history to evaluate them via traditional metrics.

"Many of the stock standard valuation metrics such as price-to-earnings (P/E) ratio or price/earnings to growth (PEG) can be completely useless when analysing immature companies," stated the Ophir investment strategy note.

"Without years of financial data to rely on, early-stage companies and their investors must employ more creative ways to substitute these inputs."

The Ophir team took Afterpay to demonstrate why conventional metrics fall over for many growth shares.

"How can it be valued so high when it doesn't make a profit?… Our answer is simple: Afterpay's valuation, such as its P/E, is so high because it is deliberately keeping the 'E low to non-existent by reinvesting for future growth."

So how do we measure the worthiness of early-growth companies? How can we find our next 10-bagger?

Ophir suggested four ways investors can increase their chances of landing one of these beauties.

What does this growth stock actually own?

The Ophir team suggested "identifying assets" as one way to validate how an early-stage business compares to its peers.

"You list the company's assets which could include proprietary software, products, cash flow, patents, customers/users, or partnerships," the memo read. 

"Although you may not be able to precisely determine (outside cash flows) the true market value of most of these assets, this list provides a helpful guide through comparing valuations of other, similarly young businesses."

Seek alternatives to revenue

Revenue growth is certainly important, but it might not be enough to understand the potential of the business.

"In addition to (or in place of) revenue, we look to identify the key progress indicators (KPIs) that will help justify the company's valuation," the memo read.

"Some common KPIs include user growth rate (monthly or weekly), customer success rate, referral rate, and daily usage statistics."

The team admitted finding these other measurables can sometimes be difficult.

"This exercise can require creativity, especially in the start-up/tech space."

Are returns greater than capital costs?

The answer to this may seem obvious but can get lost in the fervent search for the next hot growth stock.

Growth can only happen if the return on capital is positive.

"A key element in determining the quality of growth is assessing how much the firm reinvests to generate its growth," the Ophir report stated.

"For young companies, reinvestment assumptions are particularly critical, given they allow investors to better estimate future growth in revenues and operating margins."

Change in wind direction

Companies starting out in their journey can have their fortunes made or broken from certain events.

So the Ophir team recommends keeping an eye on the possibility of coming catalysts.

"When a young company achieves significant milestones, such as successfully launching a new product or securing a critical strategic partnership, it can reduce the risk of the business, which in turn can have a big impact on its value," the memo stated.

"Significant underperformance can also result when competitive or regulatory forces move against a company."

Motley Fool contributor Tony Yoo owns shares in Afterpay, Alphabet and Amazon. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended AFTERPAY T FPO. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Alphabet (A shares), Alphabet (C shares), and Netflix. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Amazon. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool Australia has recommended Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Growth Shares

A man looking at his laptop and thinking.
Growth Shares

What I'd buy with $2,000 on the ASX right now

Here are three options for investors to look at this month.

Read more »

Silhouette of CEO standing in conference room looking out at cityscape
Growth Shares

3 founder-led ASX 200 shares with serious long-term upside

Let's see what makes these shares top picks according to analysts.

Read more »

Man holding out Australian dollar notes, symbolising dividends.
Growth Shares

Where to invest $5,000 in ASX 200 shares in May

Analysts think that these shares could be top picks for Aussie investors next month.

Read more »

Two happy excited friends in euphoria mood after winning in a bet with a smartphone in hand.
Growth Shares

3 fantastic ASX growth shares to buy with $2,000 in May

Analysts think these shares would be top picks for growth investors right now.

Read more »

A man points at a paper as he holds an alarm clock.
Growth Shares

3 ASX 200 stocks to buy and hold forever without thinking twice

Here's why these shares could be great buy and hold options for investors.

Read more »

A person with a round-mouthed expression clutches a device screen and looks shocked and surprised.
Growth Shares

3 unstoppable ASX growth shares to buy and hold for the long term

Analysts have good things to say about these top stocks.

Read more »

A woman wearing dark clothing and sporting a few tattoos and piercings holds a phone and a takeaway coffee cup as she strolls under the Sydney Harbour Bridge which looms in the background.
Growth Shares

Top Australian stocks for a $7,000 investment today

These stocks are highly rated by analysts. Let's find out why.

Read more »

Two doctors give the thumbs up to an x-ray
Growth Shares

Down 9% in a month! The ASX200 growth stock I'm watching

This healthcare stock could be a buy low option. 

Read more »