How to Spot a Stock That Is About to Soar
Looking for the Next Google
Google held an initial public offering on August 19, 2004. The IPO came out at $85 per share. If you had bought 10 shares that day and never sold, you would have 12 class A shares and 12 class C shares today—thanks to a stock split and dividends—which would be worth about $25,000 in late 2018, a 2,841 percent total return.
So if you were trying to pick the next Google, how would you do it? A good place to start is to study what some of the best-performing stocks have in common.
Look for World-Changing Ideas
Early investments in companies like Microsoft, Amazon, Apple, and Google provided investors with massive returns. While they may be atypical for the market overall, it is exciting to consider how you may be able to replicate the results of investors who brought home 1,000 percent or better from a single stock.
Each of these companies had an idea that changed the world. Microsoft helped put a computer on every desk in every workplace and most homes in the world. Google changed how we search for information and monetized that search. Amazon changed how we shop. Apple changed how we use phones and the internet. And massive growth is not limited to the technology industry. Between 1996 and 1999, Walmart saw its stock price multiply six times as it cemented its position as the world’s largest brick and mortar retailer.
Target Solid Businesses
GoPro promised to change how we capture and edit video, with its namesake GoPro camera at the front and center. After an IPO at $24 per share, the stock shot up to $86 per share over the following months. Then came a lengthy, slow decline that brought the stock down to around $5 per share as of late 2018. What happened at GoPro that made it different from Facebook, Google, and Amazon?
GoPro did not actually change the world. It just makes cameras. And while it sells over $1 billion worth of cameras every year, the company saw sales decline in 2016 and net profits turned into losses nearly every quarter for the past several years. Just because GoPro wanted to change the world does not mean it had the ability to do so, or even earn a profit.
Facebook was able to follow through on its vision. Despite several missteps, the company has grown steadily from an IPO price of $48 per share to a high of $207. And while the stock price has fallen to around $125, tracking with the overall economy, with billions of users and a $15.9 billion profit it 2017, there is little question as to why Facebook has quickly become one of the world’s most valuable companies.
Make an Early Investment
Tesla is another company with lofty goals to change the world. What began as an electric car manufacturer has grown into one of the largest producers of batteries in the world. Tesla owns solar power business Solar City, released the Tesla Powerwall, and built a $1 billion “Gigafactory” in Nevada to capture additional economies of scale in battery production.
Tesla’s stock price was a wild ride for its first several years. The stock hovered around $30 to $40 per share until 2013 when the stock began an upward roller coaster. The stock price sits around $320 per share in late 2018, 10 times the price just six years ago. But even still, questions over the ability to deliver car orders, contain costs, and some zany-sounding business ideas can make Tesla a riskier bet than some companies, though they've proven there are also significant opportunities for reward.
Venture Capital Approach
Venture capital firms invest in risky startups knowing most of their picks will fail. If they make 10 bad investments and one offers a 10 times return, however, the company will break even despite the losses. The same is true of risky stocks. If you own a diverse portfolio, it does not matter as much if a few stocks fall. If you hit it right with one or two good stock picks, it can make up for losses across your portfolio.
This is not a foolproof tactic, as it is possible for your entire portfolio to drop at once, which happened to many investors in The Great Recession in 2007 and 2008. But spreading the risk across many stocks will help alleviate some of the downsides of investing in speculative, high-risk stocks.
To get the best returns, investors are smart to buy into IPOs as early as is possible. Some will turn into a loss like with GoPro, and others might turn into the next Google.
The next biggest companies in the world are not born every day. They are few and far between. But if you can pick the next world-changing idea with the right team behind it, you may be on to the next Google.