Do you know what a “5-bagger” is?
Do you know what a “5-bagger” is?
It’s a stock that rises five-fold from your original purchase price.
A $1 stock becomes a $5 stock.
A $5 stock becomes a $25 stock.
You get the picture.
When I invest in a stock I’m always looking for a “5-bagger or better”.
If I’m going to put my capital at risk, I want huge upside (500% gain?)
Why am I telling you this?
Today, I’m going to teach you the “secret” to finding these 5-baggers.
You’ see to make a stock rise 5-fold something drastic needs to happen.
You won’t make 5 times your money on an undervalued stock.
You won’t make 5 times your money on big companies like Walmart.
In fact, most stocks that rise 5-fold have a market cap of $100m or less.
And the biggest reason a stock rockets 500% or more is because of EARNINGS.
If earnings are rising a stock has nowhere to go but up.
And the secret to finding these 5-baggers is something I call…
(Most people call it “operating leverage” – But I like to think of it as gearing.)
Think of when you’re driving.
You start off in first gear and gradually work through the gears.
In the lower gears you accelerate quickly, but you only reach top speed in the highest gear.
This is very similar to the plight of rapidly growing companies.
They start off in 1st gear, probably with NEGATIVE net income.
As they progress they grow very rapidly (i.e. accelerating in lower gears.)
Before long their growth (read: acceleration) slows down, and they start producing positive net income.
At this point they’re in 4th or 5th gear.
This is the point you sell, hopefully for 5-times your money.
I think I’ve taken this analogy as far as it will go.
But you see my point:
The trick… is to identify these “fast growers” when they’re in 1st or 2nd gear.
And the hallmark of a 1st or 2nd gear company is either low or negative net income.
If you invest in stocks based solely on earnings multiples, you’ll never find a 5-bagger.
By the time the stock is earning huge amounts – It’s too late.
You’ve missed the boat.
Learn more about this with the Day Trading Robot…
So let me explain how this “gearing” works.
Companies have both “variable costs” and “fixed costs”.
Variable costs are the costs of producing each item. The labour, the materials etc.
Fixed costs are the costs of being in business. The salaries of upper management, building rent, property taxes etc.
Let’s say a business manufactures and sells cigars.
Each cigar sells for $10.
But each cigar costs $4 to make.
The $4 is the variable cost (variable because it rises and falls with revenue.)
Each cigar has a 60% gross profit margin, and contributes $6 towards covering fixed costs.
If the cigar company has fixed costs of $10m a year.
Selling enough cigars to contribute $10m is the companies break-even point.
Any cigars sold over and above this figure contribute $6 in pure-profit.
The entire $6 drops to bottom line net income!
Here’s the trick:
Once a company gets to the point where they’re covering fixed costs.
Earnings can ROCKET.
First the stock will rocket as earnings turn the corner from negative to positive.
As the company sells more and more cigars each year.
Earnings continue to rise.
In this way, a company growing revenues at just 20% a year…
Can actually be growing earnings at 50% a year.
This is because of Operating Leverage or GEARING.
In this regard, accounting is backwards looking.
The financial statements of a fast grower won’t tell you to invest.
In fact, the financial statements will show the company to be bleeding red ink.
And this is your opportunity.
You need to know the story.
You need to know exactly WHY earnings will continue growing.
Then you need to plot at exactly what point earnings will turn positive.
And how fast you expect earnings to grow based on the effects of Gearing.
It’s a simple concept.
But if you understand gearing it can make you a fortune.