Four Keys to Finding Your Next 1,000% Winner
Editor's note: Don't waste your time on companies that can't make you 5 or 10 times your money...
When curating a high-quality portfolio, you don't need to fill it with tons of investments. In fact, Enrique Abeyta – an editor at our sister company Empire Financial Research – says it's best to narrow your focus to a few standout opportunities...
According to Enrique, if you know what to look for, you can easily identify the best of the best – and avoid the headache of trying to predict what stocks could improve over the long term. Over his 25-plus years as a professional investor on Wall Street, he's found four main factors to consider in your search for the "cream of the crop"...
In today's Masters Series, which originally ran in the May 8 issue of Empire Financial Daily, Enrique shares why big growth leads to big returns... reveals what "earnings revisions" can tell you about a stock... and explains the importance of the long-term trend...
Four Keys to Finding Your Next 1,000% Winner
In my Empire Elite Growth service, my team and I are willing to patiently wait until extreme setups show up in the markets.
You don't need a huge number of holdings for an ideal portfolio – so it's critical that you make your ideas count. You want to look for the cream of the crop... unique businesses and companies in extreme situations.
To identify these companies, we look at four key criteria...
1. Big Economic Upside
Regardless of valuation, companies that grow economic value see their stocks go up over time. This is the most powerful correlation in the markets, and for good reason...
A company that grows earnings 10% per year may double over time... But wouldn't you rather find companies that grow their earnings 100% to 5,000%?
To find big returns, look for companies with big economic growth.
Take online-dating company Match Group (MTCH), for example...
Match runs the world's leading online-dating services. Its brands include Match.com, Tinder, Plenty of Fish, OkCupid, Hinge, and more.
Considering that practically everyone on Earth is interested in finding a partner, and almost everyone already has (or will one day have) Internet access, that's a total addressable market of more than 7.5 billion people. Let's cut that figure in half – to around 3.3 billion – to exclude children, married folks, etc.
Match currently has more than 11 million paying customers. The company has plenty of room to grow – another 3.29 billion potential customers, give or take. (We're obviously making some assumptions here, but the point is, Match has incredible economic upside.)
2. The Common-Sense Test
Many companies out there have the potential for huge economic upside.
One that has dominated the press in recent years is WeWork...
The company argued that its end markets – commercial real estate – were massive. Prior to the COVID-19 pandemic, commercial real estate in the U.S. was worth more than $15 trillion. (The global market is probably five times that number.)
In 2018 – before its disastrous initial public offering ("IPO") collapse the next year – WeWork generated $1.8 billion in revenue, or 0.00012% of the U.S. market! If it could capture even half a percent of the U.S. market, its revenue would go up more than 400,000%.
That's the definition of huge economic upside.
There was one big problem, though... WeWork's core business model simply didn't make any economic sense. The company made $1.8 billion in revenue but lost $1.9 billion (and burned even more cash than that).
On almost the same amount of revenue ($1.73 billion) in 2018, Match earned $653 million in earnings before interest, taxes, depreciation, and amortization ("EBITDA") and $530 million in net income, and produced positive free cash flow ("FCF").
At the time, bulls argued that WeWork would eventually become profitable. But if you don't need to own lots of stocks, why would you waste your time and money waiting to find out?
Instead, why not find companies with huge economic upside that are already making money (like Match)?
3. Positive Operational Momentum
We want to see companies that are both growing and exceeding Wall Street expectations.
It's impossible to know exactly how good a company's management is. But if the company is growing and beating expectations, then management is showing it can execute.
When we say "positive operational momentum," we're looking for positive earnings revisions in a majority of the quarters over the previous two years. In the following two charts, you can see historical revisions for both revenue and earnings per share ("EPS") for Match...
Again, you can see that over time, Wall Street analysts had to keep upping their revenue estimates to keep pace with Match. And Match continues to beat them. With time, that has led to big gains in the stock.
4. A Strong Long-Term Trend
The 250-day moving average (250-DMA) is a good way to gauge a stock's long-term trend and positive price momentum. With roughly 250 trading days in a year, the 250-DMA is essentially the 12-month moving average.
A 250-DMA on the rise shows us that the market is responding to a company's value creation and that the balance of buyers versus sellers remains positive.
Here's the long-term chart for Match, plotted alongside its 250-DMA...
It doesn't take a genius to see that Match's chart goes from the bottom-left corner to the top-right corner. In other words, the long-term trend is up.
Why try to figure out when a stock will go from being disliked over the long term to liked... when we can find a smaller number of stocks at any given time that we know the market likes?
Look for stocks with big economic upside that pass the common-sense test, continue to beat analyst expectations every quarter, and have a strong long-term trend... These are the companies that can produce huge returns in the market over time.
Regards,
Enrique Abeyta
Editor's note: Enrique has used these investing criteria to identify what he says could be the best stock he has ever found. It's a way to play the booming cryptocurrency market without having to identify a single crypto to speculate on – essentially a "back door" into the cryptocurrency world...
According to Enrique, those who get in now could stand to make gains as high as 1,000%... but the window of opportunity is closing fast. He recently published a video update with the full details about this unique investment. Click here to learn more.