In order to invest in what Peter Lynch calls “Tenbaggers” (stocks that increases 10 times from your initial purchase) you should look at companies that have superior earnings power. In other words, if you want to generate triple digits and grow your portfolio in a meaningful way, you should look at companies with incredible products, entrepreneurial management teams and potential new product releases. In this article I will cover three companies that show interesting competitive advantages that will enable them to achieve long-term success in promising and growing markets like electric vehicles, smartphones and innovative consumer devices. While I think these companies are unrelated, I am sure they have specific key drivers in common: superior earnings potential and a growing market share. Let’s go and look for Tenbaggers!
Could Tesla be the Apple of Automobiles ?
Tesla Motors Inc (NASDAQ:TSLA) is an electric vehicles and components manufacturer that has been performing very well in the past year, and extremely well in May. On May 8, it reported positive earnings for the first time in its history, with an EPS of $0.12 that beat analyst estimates of $0.04 and generated a positive market reaction that drove the company to a market capitalization of $8.7 billion, surpassing Fiat’s market cap of $7.7 billion. To a great extent, this price increase is driven by short sellers covering their positions after the positive surprise earnings. Tesla Motors Inc (NASDAQ:TSLA) is one of the most shorted stocks in the Nasdaq, with a short interest, comprised of a significant portion of naked short positions, of approximately 40% of Tesla Motors Inc (NASDAQ:TSLA)’s float. But to a certain degree this price action reflects improved fundamentals and growth prospects. Tesla Motors Inc (NASDAQ:TSLA)’s Model S received outstanding reviews, and efficiency gains and increased margins all positively contributed to the bottom line.
I think that Tesla Motors Inc (NASDAQ:TSLA) will succeed in the long run because it is in the way of moving from a niche luxury market (Model S/X) to a mass affluent segment (upcoming model Gen III), a strategy that could mean exponential future profits. In addition, the company has been improving its balance sheet and offers customers the possibility of owning a Tesla Motors Inc (NASDAQ:TSLA) for just a $400 monthly payment from a newly released lease buying program. These kind of “high growth plays” are very hard to analyze from a value-investor perspective: for example, who could have predicted that Apple’s 2004 P/E of 60 will end up being cheap because the company will release the iPhone and iPad some years later? A similar case happened with Amazon in 2004, as the company has been trading at high multiples since the stock became public, but the stock keeps rising.
Forward looking, the stock should be able to produce a model costing just $35,000 in about three to four years. In addition, Tesla plans to dramatically expand its electric-car charging network and could partner with Google to develop self-driving electric cars. While the stock is extremely expensive at this time, I think that it is one of the companies that has the biggest room for appreciation in the coming years. Some Bulls even think that the stock could trade to $300 as the company keeps expanding and delivering double-digit earnings growth.