- Stocks with six-fold gains shared some common traits, according to a T. Rowe Price Study.
- High-return stocks tend to have strong sales growth, strong earnings growth and realize high returns on invested capital.
- We found 11 stocks with the traits identified by the study.
There is one type of stock every investor wants: the high-return stock. This is a stock with triple-digit percentage returns or better. Peter Lynch used the term "bagger" to describe such stocks (e.g., a five-bagger, a 10-bagger, etc.). These stocks create a significant amount of wealth and give you great bragging rights. The challenge is finding such stocks before their best days in terms of return are over.
T. Rowe Price recently conducted a study into high-return stocks. They focused on stocks with six-fold gains (aka, six-baggers). These are stocks achieving 20% or more in annualized gains over a 10-year period. They found that such stocks aren't very common, but they do share some common traits.
The study looked at Russell 3000 stocks with market capitalizations between $1 billion and $3 billion. It was conducted using rolling 10-year periods from 1996 through 2013. Despite casting a pretty wide net, the analysts at T. Rowe Price only found 116 unique companies over the entire 17-year period. During an average rolling 10-year period, only 11 six-baggers existed. In other words, high-return stocks are rare birds. When you get one, be appreciative of how lucky you are.
Not surprisingly, strong growth is a shared trait. On average, the high-return stocks had median annual sales growth of 19.5% and median annual earnings growth of 17.1%. They were profitable, with an average annual return on invested capital (aka, ROIC) of 18.4%. They also had strong management teams.
If these traits don't sound too surprising, what follows may. T. Rowe Price says the leading sectors for high-return stocks included consumer staples, energy and industrials. Furthermore, six-baggers experienced an average decline of 27.1% at some point during their 10-year climb.
Preston Athey, who manages the T. Rowe Price Small-Cap Value Fund (MUTF:PRSVX), was quoted as saying that there are typically three ways stocks might achieve six-fold gains. "The first is that it is truly a growth company and consistently puts up high-growth numbers. The second is a company that may be near bankruptcy or is really deep value and it comes back from the dead. The third is a little of both: A company that may be under the radar screen, perhaps with a checkered history, and it's really cheap, but not because it's a horrible company. It's just been neglected and hasn't performed very well, but maybe new management comes in and the company starts doing better."
Listed below are stocks matching or exceeding the median growth and profitability quantitative criteria identified by the study. These stocks were found through a simple screen on our Stock Investor Pro stock screening program; further analysis should be conducted before deciding to invest in them. Additionally, keep in mind the element of luck that is at play. A well-run company with good growth and ROIC characteristics may only achieve decent, but not great, returns. It may also end up being a complete flop, or worse. Much has to go right over a period of years for a stock to turn into a six-bagger or better.
Table 1. Stocks with Characteristics of High Returners
ROIC 5-yr. (%)
Sales Growth 5-yr. (%)
EPS Growth 5-yr. (%)
American Equity Investment Life
C&J Energy Services
Grand Canyon Education
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.