Potential Multibaggers: The System Works

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Includes: BZUN, CTRP, JD, MOMO, OKTA, SHOP, TLND, WB
by: From Growth to Value
Summary

This is my 100th article for Seeking Alpha and I wanted to make it something special.

I have written most articles on Potential Multibaggers, either to present them or to follow up.

It seemed appropriate then, to have an article about the performance of the Potential Multibaggers as a portfolio.

With the weak results of Chinese stocks and 5 Chinese stocks out of 7 in the Potential Multibaggers, can it beat the market as it should, theoretically?

Introduction

This is my 100th article for Seeking Alpha and just as my 50th article, I wanted to make it a bit special. Then I wrote an article called 10 Investing Lessons For Long-Term Investors. I still like the article and I wanted something special for my 100th article too. When I looked back on all the articles, I saw that I had written the most articles about Potential Multibaggers, either for the first time, when I introduced the eight stocks in my ongoing series or as a follow-up after earnings, big price movements or surprising news. So I thought that the time had come to look back on the picks and see if the system really works. Can it beat the S&P 500 benchmark substantially?

The System Of Potential Multibaggers

First let me introduce you (or reintroduce you for loyal readers) to my series of Potential Multibaggers. In my article about why you should have growth stocks in your portfolio, I wrote about the foundations of my growth stock strategy, which are more qualitative than quantitative. That article was somewhat a theoretical cornerstone for my series of Potential Multibaggers. In short, it shows that you only need a few good growth stock picks to have very high returns.

A few good picks can make you outperform the market because of the asymmetric risk there is in investing. After all: you can only go down by 100%, but you can go up by 1000s of percentages. In these articles, I pick stocks that I believe to have the potential to become multibaggers (at least tenbaggers) over the course of years. That last element is very important: it is mainly a buy-and-hold portfolio, but of growth stocks, not of the more traditional buy-and-hold dividend stocks.

In September 2018, I added Weibo to the Potential Multibaggers portfolio and in December 2018 Okta (OKTA). Those were the sixth and seventh stock in the portfolio, after Shopify (SHOP), Baozun (BZUN), Momo (MOMO), Ctrip.com (CTRP) and JD.com (JD). I have recently also added Talend (TLND) but that article has been out just this week, so I will not take Talend into account.

With five Chinese stocks out of seven Potential Multibaggers and with Chinese stocks down so substantially, this must be a bag of losers, right? And with the highly reported negative buzz around JD.com, whose CEO and chairman Liu was even arrested in a rape case, this nice theory of mine definitely learned to know the reality of investing, didn't it? Let's find out.

Pick#1: Shopify

The series of Potential Multibaggers was kicked off on May 2, 2017, with the first pick in the series: Shopify. I did three follow-up articles on Shopify:

In the first follow-up article, I connected the company with a trend in society: rising rates of entrepreneurship as a reaction to the outsourcing of more and more jobs, not only industrial but also in services.

In the second follow-up article, I tried to pierce through the curtain to the numbers and provide a valuation guide for Shopify. The curtain, in this case, is that Shopify is growing so fast that it is impossible to apply traditional metrics, just as it has been impossible for Amazon or Netflix (NFLX) for a very long time.

In the third follow-up article, I looked at Shopify's Q4 and FY 2018 earnings to check if the company is still on the right track. And I am very confident that it is. The company keeps firing on all cylinders. The earnings were great again, and Shopify keeps doing all the right things to keep growing at a high pace.

I also had the honor to be invited to the podcast "Behind the Idea" about Shopify. I highly recommend you to subscribe to that podcast series on iTunes or whatever podcast player you use - always highly informative for everyone who loves an in-depth analysis of stocks, with the great hosts Seeking Alpha editors Daniel Shvartsman and Mike Taylor.

But what you may be curious about by now: what has Shopify done so far? You can probably guess it is a winner. A great winner, actually:

Chart Data by YCharts

Pick #2: Baozun

In the week after I picked Shopify, I wrote about another Potential Multibagger, #2 in the series, Baozun. I have written eight follow-up articles on Baozun so far, too many to list them all here. I still firmly believe in its potential and I can't believe Baozun is so cheap right now. I am already overweight Baozun, but I were not, I would be adding at these prices.

But it is a very volatile stock and Baozun's market cap is still only $2B, which will not reduce the volatility. That is why I wrote articles like

Baozun Falls 25% After Earnings. Why And What Should You Do?

Baozun Up 31%: The New Strategy Impresses

Why Baozun Fell 20% (And Why You Should Take Advantage Of It)

This shows another element of Potential Multibaggers: they tend to be very volatile. Shopify, for example, was at $119 at the end of December, only two months ago. It is at $189.20 at the moment of writing. That is up 60% in just two months. So if you want to invest in Potential Multibaggers, you should be able to keep your eyes on the road and not be shaken by high volatility, up or down.

But back to Baozun. This is what it has done since I first picked it to be part of the Potential Multibaggers:

Chart Data by YCharts

So, again, Baozun is a great winner, but it could have been a much bigger winner. In the summer of 2018, its share price was in the low 60s. At $37.79, the price when I am writing this, I think it is a steal for investors who don't mind volatility and can keep such a wild stock in their portfolio for a long time and still sleep well at night. Hey, that's me!

The company is still in the transition from owning products to sell to not owning (service and consignment), which makes the numbers somewhat harder to read. More about that in this article.

Pick #3: Momo

Another Chinese stock and another undervalued stock, in my opinion. I picked Momo on July 20, 2017, to be the third Potential Multibagger. I have written five follow-up articles so far. About a year ago, Momo bought TanTan, which you could call the Tinder of China. I thought this was a great acquisition and I thought Momo couldn't stay so cheap after that. Well, it did. The market can be strange sometimes, which, of course, makes it so fascinating. This is what Momo has done since I first picked it:

Chart Data by YCharts

So this is the first loser. Down by more than 18%, while the S&P 500 is up 13% over the same period. Ouch. Just a month ago Momo was down even a lot more. Again you see the very high volatility in the stock price. I think Momo really is a steal right now: a P/E of 16.9, a forward P/E of 12.3 and that for a company that is expected to grow its earnings by around 20% annually for the next five years. Sometimes the market gives you golden opportunities and I think this is one. So I am still very confident about Momo.

Pick #4: Ctrip

The next pick was in January 2018 and it was Ctrip, another Chinese stock. I called it the Booking (BKNG) of China (well, actually the Priceline, since that was the name still of Booking), but since then I am less enthusiastic about Ctrip. I wrote a follow-up article under the title Ctrip: Three Problems. My conclusion: 'Ctrip is still a great company, but it would not be wise to completely ignore the problems.' I still have Ctrip in my portfolio, but it is just a tiny position since I always add to positions over time if I keep liking them. Ctrip is another loser for the Potential Multibaggers portfolio:

Chart Data by YCharts

Minus 28.5%, while the market is essentially flat. Another ouch. And here comes another ouch for the fifth stock, the biggest ouch of all.

Pick #5: JD.com

JD.com is the worst pick I have made in the Potential Multibaggers ... so far. I add 'so far' not because I intend to add bigger losers than JD, but because I still believe strongly in the company and I have high confidence that it will come back sooner or later. Benjamin Graham, the Dean of Wall Street and the mentor of Warren Buffett, advised holding your undervalued stocks for three years. In that period a lot can happen, but if after those three years nothing has happened to revigorate the stock price, you will probably have to wait for a very, very long time. I honor that rule, so no way I will sell JD before January 2021 and I am pretty confident it will do fine before that time, as I wrote in my latest article on JD: Earnings don't matter. But so far, JD has been a huge loser:

Chart Data by YCharts

I have written 8 articles on JD.com, only topped by the 9 of Baozun. I think both are excellent investments and very interesting companies to learn about.

Pick #6: Weibo

Despite the fact that I knew very well by now that Chinese stocks underperformed in 2018, to say the least, I was not afraid to pick a fifth (out of six until then) Chinese stock in the series of Potential Multibaggers in September 2018: Weibo, the Twitter of China. Weibo's (WB) stock price had already been beaten down by the negative outlook on Chinese stocks when I added it, but it has not been a winner too:

Chart Data by YCharts

While it was down by more than 30% just a few weeks ago, it just loses 1.5% versus the market at the current price. Last week, I wrote a follow-up article on Weibo.

Pick #7: Okta

The last pick I use here (Talend really is too fresh) is Okta. I picked the stock on December 10, 2018. It was actually the first American stock in the Potential Multibaggers portfolio, which may be surprising to a lot. But I really believe that if you invest for the long term, the Chinese stocks I have picked will outperform over the next years and decades and are extremely cheap. Okta is not cheap, but I still like it a lot. It has also been a great winner so far:

Chart Data by YCharts

The results (so far)

If you would ask any investor: 'Is it possible to outperform the market with 7 stocks, of which 5 are Chinese, in this market conditions?' I think most would answer, without a doubt: 'Not at all!' But according to the growth stock theory that I wrote about, it should, since a few outperformers should outweigh all the losers and have enough fire powder left to also beat the market. Let's check the results so far of the Potential Multibaggers.

(Compiled by the author. Remark: Some prices might differ a little bit from the graphs, because I took the day that I have written the article, not that it was published.)

The Potential Multibaggers have outperformed the S&P 500 by more than 20%. And that is with huge headwinds like the trade war threats, over-concentration on China, a general market downturn recently and a lot of volatility. With just three winners out of seven, the Potential Multibaggers crush the market. And this is typically for the Potential Multibaggers, as I had predicted: high volatility, some big losers and a few huge winners that more than make up for the losers, making your portfolio outperform the market substantially.

The Potential Multibaggers are a work in progress and that means that the portfolio still has inherent flaws. This is just a part of my real portfolio (I am personally long all of the stocks), but on its own, this Portfolio is not diversified enough: too much China exposure, too few stocks. So I will keep adding stocks. I would advise anyone to add several of these stocks too if you like them, but don't go all in. Add over time.

I still like all the picks I have made (maybe with the exception of Ctrip), I still hold them in my own portfolio and several are still very cheap today, in my opinion. Expect high volatility if you add them to your portfolio, but as you can see, that high volatility makes you outperform the market too.

Conclusion

Even with five stocks out of seven Chinese and with four losers out of seven and with two big losers (Ctrip lost almost 30%, JD.com almost 50%), the Potential Multibaggers are able to outperform the market by more than 20%. Once the Chinese stocks will come back, I am confident that the outperformance will continue and probably become even bigger.

I will keep adding Potential Multibaggers. If you don't want to miss the articles, please feel free to hit the follow button.

In the meantime, keep growing!

Disclosure: I am/we are long WB, MOMO, BZUN, SHOP, OKTA, CTRP, JD, TLND. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.