Multibaggers - what a new US study confirms about our UK findings

You may remember our 2023 analysis of the top ten UK multibaggers of the last decade.  Now there’s a fresh, data-heavy paper - *The Alchemy of Multibagger Stocks* by Anna Yartseva - a Birmingham City University academic - that analyses US stocks across many of the same dimensions.

In summary, the US evidence marries up very well with what we saw in the UK.

What the US study says

Yartseva built up a 2009–2024 dataset of 464 ten-baggers (stocks that rose greater than 10x and were still greater than 10x at the end of the period). She then tested what actually drove those returns by creating 36 portfolios split by size, value, profitability and investment characteristics.

Key insights

• The best performing multibaggers started small, with an average market cap $348m in 2009.
• Multibaggers, regardless of starting size, benefited from low valuations (the average forecast P/E was only 11x at the start).
• Through their runs, the average multibagger compounded its growth at high rates: revenue at an 11% annualised rate, operating profit at 17%, and EPS at 20%.
• Across the set small size, relative cheapness, high profitability, and aggressive capital investment led to stronger returns.
• The paper also re-states our multibagger equation : EPS growth + P/E Multiple expansion.

The chart below shows the 464 multibaggers split into 36 buckets by their characteristics and their “next year price returns” accordingly. It’s worth trying to understand the dimensions. On the right are cheap stocks (Value High), with splits across robust or weak profitability and conservative or aggressive investment. 

You can see at the far right that the very best returns were in undervalued small caps with high profitability and aggressive investment.

A simple guardrail emerges.   Be very wary when a multibagger you own shows lower profitability and stops investing, especially if it’s at a moderate or premium valuation. That’s when drawdowns are going to hurt.

How this echoes our UK top-ten work

In our UK study and masterclasses we emphasised five “financial engines” for multibaggers:

1. Sales growth runway - winners found new geographies, products or channels (e.g., Games Workshop’s international and licensing push).
2. Operating leverage - i.e. revenues up, profits up faster. We showed how many of the UK top ten expanded operating margins through their run.
3. High and rising ROCE - the true engine of compounding: multibaggers reinvested their profits at high rates of return and maintained those high returns.
4. Strong cash conversion - cash is needed for self-funded growth: self funded cash beats borrowing or raising funds to expand.
5. Room for a P/E multiple re-rating - a low P/E at entry provides a rocket fuel to the share price when ratio expands.

The US paper’s “small + value + profitability” recipe sits comfortably with this general playbook. 

We also found that simple and sustainable business models were the best for finding top multibaggers. There were actually no technology stocks in the UK set at all. I was expecting to see a dominance of technology stocks in the US multibagger report, but this wasn’t the case. Only 20% of Yartseva’s 464 Multibaggers were in technology. Of course, the study began in 2009, and the industry dynamics have changed in the USA with cloud computing and AI having evolved since that date, so these industry dynamics can change.

What’s new?

A few useful points of note stood out:

• Aggressive capital investment showed up as a strong positive within US multibaggers. Yartseva found that higher asset growth paired with rising EBITDA growth was strongly aligned with outperformance. But there’s a caveat, if asset growth grew faster than EBITDA, forward returns dropped.
  • In other words, companies should invest aggressively, if the profit engine can carry it. This is a strong counter to the general theme across academic finance that low investment (conservative) firms outperform high investment (aggressive) firms. Multibaggers really are the anomaly.
  • In our UK case studies, we did discover that six out of ten of our multibaggers practiced disciplined bolt-on M&A, and reinvested the majority of their profits when cash generation was strong. This is the same principle through a different lens.
• Growth variables turned out to be less significant on a one-year view - using trailing measures of earnings growth, free cashflow growth appeared to be less significant for the next 12-month returns. This is counter-intuitive, as it’s often the first thing people screen for. Far more important was the investment growth rate as defined above, as long as it was higher than earnings growth.
• Be highly wary in increasing interest rate environments - Multibaggers tend to underperform dramatically in these periods, by as much as 8-10%.

An example - a recent real-world 20-bagger: Celestica

One of our members, Phil Hoffer, is going to be joining us for a webinar next month (invite link to follow soon). He has shared on the discussion boards a few times that he’s been holding the US stock Celestica, which has 20-bagged since January 2023, and is 200% up since it was mentioned in my November 2024 US clear trends article. I have to admit this kind of return rather puts the UK stock market to shame, as it took a full decade for our big winners to 10x on average!

It’s a striking illustration of the same principles - when a low P/E multiple meets an accelerating sales growth runway and operating leverage, remarkable things happen. Celestica saw a powerful multiple expansion (from 6x to 39x) as the market caught up with the new economics.

It’s a great reminder, when both the financial engine kicks into gear and the narrative aligns with a theme, the multibagger mathematics can happen surprisingly fast!

Simple rules you can use

Let’s summarise with a recap of rules from this paper and our own research:

• Seek small/mid caps with lower starting valuations (for example a Price to Sales of less than 0.6, or a forecast P/E below 11 at the start), seek improving profitability, and companies that have opportunities for profitable investment.
• Prefer double-digit sales growth with operating margin expansion.
• Expect the best returns to come from a combination of EPS growth + multiple expansion - don’t rely on just one. And remember EPS growth is a function of both Sales Growth and Operating Leverage. This defines our Multibagger Equation:

Yartseva appears to be working on a checklist approach for finding Multibaggers - much like the Piotroski F-Score approach. I will be looking forward to seeing what she comes up with in her future research on this topic.

A reminder of our multibagger resources

We have a range of excellent resources for those wishing to learn more about multibaggers - an original webinar presentation of the research study, and then 3 half-hour masterclasses:

• Multibagger Webinar - 1 hour research study presentation.
• Masterclass: The Financial Engine of Multibaggers (sales runway, operating leverage, ROCE, cash conversion, multiple expansion) - includes the Games Workshop case study.
  • Video
  • Article Series
• Masterclass: Competitive Advantage & Capital Allocation (models, moats and managers; why tenure, founder-ownership and bolt-on M&A mattered in our UK ten).
  • Video
  • Article Series
• Screening for Multibaggers with Stockopedia (turning the rules into practical screens).
  • Video

Please let us know which multibaggers you've discovered using these principles in the comments below !