The Characteristics of High-Return Stocks
Thursday, August 7, 2014

There is one type of stock every investor wants: the high-return stock. This is a stock with triple-digit percentage returns or better. Peter Lynch used the term “bagger” to describe such stocks (e.g., a five-bagger, a 10-bagger, etc.). These stocks create a significant amount of wealth and give you great bragging rights. The challenge is finding such stocks before their best days in terms of return are over.

T. Rowe Price recently conducted a study into high-return stocks. They focused on stocks with sixfold gains (aka, six-baggers). These are stocks achieving 20% or more in annualized gains over a 10-year period. They found that such stocks aren’t very common, but they do share some common traits.

The study looked at Russell 3000 stocks with market capitalizations between $1 billion and $3 billion. It was conducted using rolling 10-year periods from 1996 through 2013. Despite casting a pretty wide net, the analysts at T. Rowe Price only found 116 unique companies over the entire 17-year period. During an average rolling 10-year period, only 11 six-baggers existed. In other words, high-return stocks are rare birds. When you get one, be appreciative of how lucky you are.

Not surprisingly, strong growth is a shared trait. On average, the high-return stocks had median annual sales growth of 19.5% and median annual earnings growth of 17.1%. They were profitable, with an average annual return on invested capital (ROIC) of 18.4%. They also had strong management teams.

If these traits don’t sound too surprising, what follows may. T. Rowe Price says the leading sectors for high-return stocks included consumer staples, energy, and industrials. Furthermore, six-baggers experienced an average decline of 27.1% at some point during their 10-year climb.

Preston Athey, who manages the T. Rowe Price Small-Cap Value Fund (PRSVX), was quoted as saying that there are typically three ways stocks might achieve sixfold gains. “The first is that it is truly a growth company and consistently puts up high-growth numbers. The second is a company that may be near bankruptcy or is really deep value and it comes back from the dead. The third is a little of both: A company that may be under the radar screen, perhaps with a checkered history, and it’s really cheap, but not because it’s a horrible company. It’s just been neglected and hasn’t performed very well, but maybe new management comes in and the company starts doing better.”

Listed below are stocks matching or exceeding the median growth and profitability quantitative criteria identified by the study. These stocks were found through a simple screen on our Stock Investor Pro stock screening program; further analysis should be conducted before deciding to invest in them. Additionally, keep in mind the element of luck that is at play. A well-run company with good growth and ROIC characteristics may only achieve decent, but not great, returns. It may also end up being a complete flop, or worse. Much has to go right over a period of years for a stock to turn into a six-bagger or better.

Table 1. Stocks with Characteristics of High Returners

Company

Ticker

ROIC 5yr (%)

Sales Growth 5yr (%)

EPS Growth 5yr (%)

Market Cap

($ mil)

American Equity Investment Life

AEL

19.8

50.5

62.3

$1,635

C&J Energy Services

CJES

20.8

76.5

126.8

$1,615

Cirrus Logic

CRUS

24.7

32.5

101.2

$1,405

EPAM Systems

EPAM

38.0

28.2

66.5

$1,787

Gogo

GOGO

19.0

54.9

30.8

$1,346

Grand Canyon Education

LOPE

23.3

30.0

62.4

$1,992

Impax Laboratories

IPXL

20.5

19.5

41.4

$1,655

Medidata Solutions

MDSO

25.4

21.2

17.3

$2,369

Myriad Genetics

MYGN

21.9

22.4

17.2

$2,778

NIC

EGOV

31.8

19.9

20.4

$1,083

Steven Madden

SHOO

18.9

23.5

34.5

$2,090

More on AAII.com

The Week Ahead

Next week, 15 members of the S&P 500 will report earnings. Included in this group will be Dow components Cisco Systems (CSCO) on Wednesday and Wal-Mart Stores (WMT) on Thursday.

The week’s first economic reports of note will be July retail sales and June business inventories, on Wednesday. Thursday will feature July import and export prices.  The July Producer Price Index (PPI), the August Empire State manufacturing survey, July industrial production and capacity utilization and the preliminary August University of Michigan consumer sentiment survey will be released on Friday. 

The Treasury will auction $27 billion of three-year notes on Tuesday, $24 billion of 10-year notes on Wednesday and $16 billion of 30-year bonds on Thursday.  

What’s Trending on AAII
  1. The Individual Investor’s Guide to Exchange-Traded Funds 2014

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  3. Model Fund Portfolio: Adjust Risk Based on Personal Factors

AAII Sentiment Survey

Pessimism among individual investors jumped to its highest level in nearly a year in the latest AAII Sentiment Survey. The spike in expectations for a short-term drop comes as neutral sentiment fell to levels not seen since January.

Bullish sentiment, expectations that stock prices will rise over the next six months, declined by 0.2 percentage points to 30.9%. During the past three weeks, optimism has fluctuated within a 1.5 percentage-point range. This week's reading keeps bullish sentiment below its historical average of 39.0% for the eighth consecutive week and the 19th time in the past 21 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell by 6.9 percentage points to 30.9%. Neutral sentiment was last lower on January 2, 2014 (27.6%). Even with the drop, neutral sentiment remains above its historical average of 30.5% for the 31st consecutive week. This is the third-longest streak of consecutive weekly readings above 30.5% in the survey’s history.

Bearish sentiment, expectations that stock prices will fall over the next six months, spiked by 7.1 percentage points to 38.2%. This is the largest amount of pessimism recorded in our survey since August 22, 2013. It is also the first time since April of this year with a bearish sentiment reading above the historical average of 30.5% for two consecutive weeks.

Bearish sentiment is near, but not at, the upper end of its typical historical range. The spike in pessimism follows the S&P 500's worst week in nearly two years and suggests some investors believe the market’s upward momentum is being interrupted. Also playing a role in the backdrop are concerns about prevailing valuations, heightened geopolitical tensions, slow economic growth and frustration with Washington politics.

Notably, bullish sentiment is still within its typical historical range. Keeping some AAII members hopeful about the short-term direction of the market is economic growth, the market’s overall upward trend, and the Federal Reserve’s tapering of bond purchases.

This week’s special question asked AAII members for their opinion about the current pace of economic growth. Approximately 20% of respondents described the rate of growth as being slow. An additional 12% said growth is occurring at too slow of a pace. Just under 13% described the rate of expansion as being dismal, anemic or weak. About 10% described the economy as steadily expanding, though many clarified their responses by describing the pace as slow. Nearly 8% thought the economy is getting stronger.

Here is a sampling of the responses:

  • “Economic growth is slower than we need, and it is uneven.”
  • “I think it is better, but there is still not enough job growth.”
  • “It may not be as strong as some people want, but it is steady, with no end in sight.”
  • “It is improving after a long struggle. I think it will continue to improve.”
  • “Slow, sluggish and subpar for a recovery.”
  • “Very tepid and not likely to improve.”


This week’s Sentiment Survey results:

Bullish: 30.9%, down 0.2 points
Neutral: 30.9%, down 6.9 points
Bearish: 38.2%, up 7.1 points

Historical averages:

Bullish: 39.0%
Neutral: 30.5%
Bearish: 30.5%
Take the Sentiment Survey.

AAII Asset Allocation Survey

Allocations to stocks and stock funds reached their highest level of the year in July, according to the latest AAII Asset Allocation Survey. Bond and bond fund allocations rebounded to levels not seen since last January, while cash allocation fell to a 14-year low.

Stock and stock fund allocations rose 0.5 percentage points to 67.5%. This is the largest allocation to equities since December 2013 (68.3%). It is also the 16th consecutive month and the 18th out of the past 19 months with equity allocations above their historical average of 60%.

Bond and bond fund allocations rose 0.7 percentage points to 16.7%, the largest allocation since January 2014. The historical average is 16%.

Cash allocations declined 1.3 percentage points to 15.8%. The drop puts cash allocations at their lowest level since March 2000 (15%). July was the 32nd month with cash allocations below their historical average of 24%.

Since hitting what was then an eight-month high in May 2014 (19.2%), cash allocations have declined by a cumulative 3.4 percentage points. Over the same period, equity allocations have risen by a cumulative 2.2 percentage points and fixed-income allocations have risen by a cumulative 1.2 percentage points. Thus, while we have not seen a big shift, there has been a rotation out of cash. Notably, yields on the five-year and 10-year Treasury bonds have risen slightly over this period. Plus, optimism about the short-term direction of stock prices has stayed below average in our weekly Sentiment Survey. Nonetheless, with yields staying near historically low levels, cash looks unattractive except to those investors who require cash reserves or expect prevailing market conditions to worsen.

This month’s special question asked AAII members how much of their portfolio is allocated to index funds (mutual funds and ETFs) and how of it is actively managed (individual securities and actively managed funds). More than 21% of respondents said between 90% and 100% of their portfolios are actively managed. An additional 10% said at between 70% and 90% of their portfolio is actively managed. At the other end of the spectrum, nearly 8% of respondents have more than 90% of their portfolio allocated to index funds and another 7% have between 70% and 90% of their portfolio passively managed. Approximately 12% of respondents said that roughly half of their portfolio is allocated to index funds.

July Asset Allocation Survey results:
  • Stocks and Stock Funds: 67.5%, up 0.5 percentage points
  • Bonds and Bond Funds: 16.7%, up 0.7 percentage points
  • Cash: 15.8%, down 1.3 percentage points
July Asset Allocation Survey details:
  • Stock Funds: 34.2%, up 1.8 percentage points
  • Stocks: 33.3%, down 1.3 percentage points
  • Bond Funds: 13.5%, up 0.7 percentage points
  • Bonds: 3.2%, unchanged

Take the Asset Allocation Survey.


Local Chapter Meetings
AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!


AAII Asset Allocation Survey

Allocations to stocks and stock funds reached their highest level of the year in July, according to the latest AAII Asset Allocation Survey. Bond and bond fund allocations rebounded to levels not seen since last January, while cash allocation fell to a 14-year low.

Stock and stock fund allocations rose 0.5 percentage points to 67.5%. This is the largest allocation to equities since December 2013 (68.3%). It is also the 16th consecutive month and the 18th out of the past 19 months with equity allocations above their historical average of 60%.

Bond and bond fund allocations rose 0.7 percentage points to 16.7%, the largest allocation since January 2014. The historical average is 16%.

Cash allocations declined 1.3 percentage points to 15.8%. The drop puts cash allocations at their lowest level since March 2000 (15%). July was the 32nd month with cash allocations below their historical average of 24%.

Since hitting what was then an eight-month high in May 2014 (19.2%), cash allocations have declined by a cumulative 3.4 percentage points. Over the same period, equity allocations have risen by a cumulative 2.2 percentage points and fixed-income allocations have risen by a cumulative 1.2 percentage points. Thus, while we have not seen a big shift, there has been a rotation out of cash. Notably, yields on the five-year and 10-year Treasury bonds have risen slightly over this period. Plus, optimism about the short-term direction of stock prices has stayed below average in our weekly Sentiment Survey. Nonetheless, with yields staying near historically low levels, cash looks unattractive except to those investors who require cash reserves or expect prevailing market conditions to worsen.

This month’s special question asked AAII members how much of their portfolio is allocated to index funds (mutual funds and ETFs) and how of it is actively managed (individual securities and actively managed funds). More than 21% of respondents said between 90% and 100% of their portfolios are actively managed. An additional 10% said at between 70% and 90% of their portfolio is actively managed. At the other end of the spectrum, nearly 8% of respondents have more than 90% of their portfolio allocated to index funds and another 7% have between 70% and 90% of their portfolio passively managed. Approximately 12% of respondents said that roughly half of their portfolio is allocated to index funds.

July Asset Allocation Survey results:
  • Stocks and Stock Funds: 67.5%, up 0.5 percentage points
  • Bonds and Bond Funds: 16.7%, up 0.7 percentage points
  • Cash: 15.8%, down 1.3 percentage points
July Asset Allocation Survey details:
  • Stock Funds: 34.2%, up 1.8 percentage points
  • Stocks: 33.3%, down 1.3 percentage points
  • Bond Funds: 13.5%, up 0.7 percentage points
  • Bonds: 3.2%, unchanged

Take the Asset Allocation Survey.