InvestorPlace - Stock Market News, Stock Advice & Trading Tips

This article is excerpted from Tom Yeung's Profit & Protection newsletter dated Aug. 9, 2022. To make sure you don't miss any of Tom's picks, subscribe to his mailing list here.

Let's face it. Finding 10x stocks is tough.

For every Meta Platforms (NASDAQ:META) that claws its way from $18 to $180, another dozen look more like Voyager Digital (OTCMKTS:VYGVQ), a crypto trading platform that went bankrupt after losing $650 million on a loan.

Or Enjoy Technology (OTCMKTS:ENJYQ), a SPAC that went bankrupt within 9 months of listing…

…Or Quibi… Celsius… Electric Last Mile (OTCMKTS:ELMSQ)…

That's because high-growth investing is much like finding a career in acting or one in organized crime.

It's a high-risk, high-reward activity.

Yet, some venture capital funds have made Hollywood stardom look easy. The well-regarded Sequoia Fund has managed to pump out 13% returns since its inception in 1970. $10,000 invested at its start would be worth $6 million today. And smaller funds like Union Square Ventures' 2004 vintage have done even better by netting investors a 67% IRR. All without joining the mafia.

These funds understand that every fund only needs a couple of billion-dollar exits to offset the other bets that fall to zero. And the more you can tilt the scales in your favor, the better the chance of long-term success.

Finding the Billion-Dollar Winners

So, how can regular investors gain an advantage?

The most obvious way to land billion-dollar winners is to scatter bets across early stage tech companies with plenty of buzz.

It's also the wrong way.

Data gathered by Profit & Protection has long shown that positive earnings growth is unintuitively a negative factor for returns. By scattering bets across too many hot-shots, investors tend to set themselves up for long-term underperformance.

Instead, the Profit & Protection system has two proven ways to find more promising Moonshots with 10x potential.

1. High-Potential Tech Stocks on Blue-Light Special

The first strategy is finding beaten-down tech stocks where the market has thrown in the towel.

Apple (NASDAQ:AAPL) in 1997…

Amazon (NASDAQ:AMZN) in 2001…

Facebook (FB) in 2012…

Tesla (NASDAQ:TSLA) in 2018 (not 2022)…

That's because even high-flying companies can run into short-term issues. And at these brief moments, the echo chamber of mainstream media can turn small speed bumps into a mountain of trouble.

"Amazon hopes that investors will ignore the inconvenient expense numbers in the real income statement," one New York Times article wrote in 2001, "which will be left out of the creative one the company emphasizes."

Yet, these negative headlines can provide incredible buying opportunities, especially if the company's market capitalization falls below $5 billion. And if you can separate the Pets.coms from the Amazons, you're even better equipped to find these 10x winners.

Today, plenty of high-quality companies now meet this first Profit & Protection strategy.

• Desktop Metal (NYSE:DM). The 3D printing company trades 92% below its all-time high, despite its market-leading position in high-speed metal-printing machines.
• Ginkgo Bioworks (NYSE:DNA). The bioengineering firm trades 82% off its peak and is a leader in bringing biotech to industrial applications.
• SoFi (NASDAQ:SOFI). The fintech darling trades 68% below its highs, despite rapid growth and a sticky customer base.
• RealReal (NASDAQ:REAL). The discount e-commerce firm is gaining scale as rivals are facing steep declines.
• POSaBIT Systems (OTCMKTS:POSAF). A Canadian point-of-sale company has few competitors in the highly regulated world of cannabis finance.
• Upstart Holdings (NYSE:UPST). The cloud-based AI lending platform has fallen 93% from its all-time high despite maintaining hyper-speed growth in its industry.

These firms are all leaders in their respective fields. And that's essential.

Consider Facebook in social media, Amazon in e-commerce and Tesla in electric vehicles.

Hypergrowth winners aren't always the first in the field…

…But they're always the strongest competitor.

Given the choice between the No. 1 star vs. the No. 2 value play, hypergrowth investors should choose the former every time.

2. Perpetual Money Machines

Meanwhile, a second class of companies can also provide investors with 10x returns… provided you wait long enough.

Starbucks (NASDAQ:SBUX). +24,900% since 1992…

Silicon Valley Bank (NASDAQ:SIVB). +62,000% since 1987…

Home Depot (NYSE:HD). +508,700% since 1982…

These companies are what I call Perpetual Money Machines. By earning high returns and reinvesting the proceeds at equally high rates, these slow-burners keep marching upwards in both good times and bad. It's compound interest at its finest.

Investors need patience with these Money Machines. A Home Depot shareholder might have happily sold their stake in 1986 for 400% returns but then miss out on more significant gains down the road.

Meanwhile, those with more self-restraint can often turn small investments into massive retirement portfolios.

To identify some of these firms, I've taken the quantitative Profit & Protection system and selected only high return on invested capital (or ROIC) companies trading under $5 billion market capitalizations with the potential for internal reinvestment.

• Shoals Technologies Group (NASDAQ:SHLS). The Tennessee-based manufacturing firm creates high-value electrical balance of systems (eBOS) for PV solar panel arrays. It's a major winner of global decarbonization efforts.
• Gentex Corporation (NASDAQ:GNTX). The auto-parts manufacturer has pursued high-value businesses such as dimming rearview mirrors and camera-based driving systems. Growth in autonomous driving almost guarantees revenue growth for the next decade.
• Alignment Healthcare (NASDAQ:ALHC). The Medicare provider looks much like UnitedHealth (NYSE:UNH) and other insurers that grew shares 10x. It's a high-barrier-to-entry business that rewards existing players handsomely.
• Planet Fitness (NYSE:PLNT). The franchise-based fitness firm shields itself from cyclical demand by shifting financial risk to its franchisees. A shift away from home exercise equipment will boost demand in the near term.

Not every firm will do well, of course. Franchise-based companies like Planet Fitness can do well, like Starbucks…

…or implode like Quiznos if they over-expand or alienate their franchisees.

But as a group, these Perpetual Money Machines operate in industries with high barriers to entry and earn sustainably high returns.

How to Invest Like a Venture Capitalist

When investing on crowdfunding sites like StartEngine, many accredited investors act as I do at a buffet.

A bite of quick-service kitchen Speedy Eats…

A sip of hard coffee firm Cask & Kettle…

A stop by Seattle-based Here Today Brewery & Kitchen…

You can afford to take dozens of samples when you have a big appetite (or huge pocketbook). Early stage venture capital firm Andreessen Horowitz alone counts 232 companies in its active portfolio

Meanwhile, investors buying later-stage companies on public markets need to act more like my partner at his favorite ice cream store.

"One tub of the Michigan special Superman ice cream," he would say. "And that will be all, please."

These professionals concentrate their bets on fewer big plays. Private equity firm Thoma Bravo fits neatly into this category.

That's because when buying 10x companies (rather than 100x or 1,000x ones), investors need to make fewer bets, so that home runs make a difference.

Tom Yeung is the editor of Profit & Protection, a free e-letter about investing to profit in good times and protecting gains during the bad. To join Profit & Protection — and claim a free copy of Tom's latest report — go here to sign up for free!

The post 10 Stocks That Could Rise 10x (Safely) appeared first on InvestorPlace.