Attention Growth Investors: 3 Ways to Identify the Next 1,000% Gainer

Learn the lessons taught by such performers as Dollarama Inc. (TSX:DOL), MTY Food Group Inc. (TSX:MTY), and AutoCanada Inc. (TSX:ACQ) when trying to choose the next growth superstar.

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The easiest way to get rich is to buy quality stocks, let them slowly appreciate while reinvesting dividends, and let time do the heavy lifting. After a couple of decades, investors wake up one day and realize they’ve done very well.

I don’t want to disparage that strategy, because it’s a good one for many investors. But what if an investor could find a way to increase that return?

How? It’s simple in theory, but hard in practice. All an investor has to do is get on the bottom floor of the next stock that goes up 10-fold.

There is no foolproof theory about how to find these stocks, or else I sure wouldn’t be sharing it. There are, however, a few attributes these huge gainers tend to have in common.

Huge potential market

When investors think of huge winners, their minds tend to immediately think about the tech sector. Companies like Facebook, Uber, or Twitter are hugely scalable with a relatively small upfront investment.

But those companies are really hard to identify, especially in the early stages. There are thousands of different tech companies out there, all with some sort of edge. Many end up doing well, but most either stagnate or eventually go bankrupt. Besides, some of the best opportunities are in sectors that perhaps aren’t considered growth areas.

A perfect example is Dollarama Inc. (TSX:DOL), a stock that’s up 700% since its late 2009 IPO. Dollarama is not a sexy business. It sells what many people would refer to as junk in a very traditional way.

When it went public, there was an obvious market for hundreds of additional dollar stores in Canada. Even now, with the chain recently surpassing 1,000 different locations, there’s still potential for hundreds of additional stores in Canada before Dollarama reaches the same saturation as in the United States.

Identify it early

Dollarama still has good potential, but it’s unlikely it’ll go up another 700%. To borrow a baseball analogy, we’re probably in about the sixth or seventh inning of its expansion plan.

Investors have to identify these opportunities when they’re smaller. One potential opportunity today could be AutoCanada Inc. (TSX:ACQ), the owner of approximately 50 car dealerships across Canada. According to analyst estimates, there are approximately 2,000 dealerships across Canada owned by almost as many owners. As these individual owners look to retire, there’s plenty of opportunity for AutoCanada to really expand its empire.

Approximately 50% of the company’s revenues come from Alberta, a province hit hard by the decline in oil. This has driven the price of AutoCanada shares down some 80% from the peak in 2014. It’s also driven the valuation to a reasonable level to just 10 times trailing earnings.

Paying 10 times earnings for a steady company is a decent deal. For a company with the type of growth profile as AutoCanada, it’s a downright steal.

Ability to self-fund

In 2008 MTY Food Group Inc. (TSX:MTY) had revenue of $34.2 million. It earned $9.9 million in profit that year, which worked out to $0.52 per share based on 19.1 million shares outstanding.

In 2015 MTY did $145.2 million in revenue, earning $26 million in profit. That works out to $1.36 per share based on 19.1 million shares outstanding. In addition, MTY ended 2015 with $33.4 million in cash and just $14.3 million in total debt.

MTY’s ability to grow without taking on much debt or issuing new equity is one of the reasons why the company’s shares have gone up approximately 5,000% from its IPO back in 1996. It has self-funded the vast majority of its own growth.

This looks poised to continue. MTY is still a relatively tiny company, and there are dozens of small fast-food chains the company could acquire. It could also help approach restaurants with unique concepts and use its expertise to help take the concept national.  Or it can continue to expand in the traditional restaurant space.

Many growth stories run into funding issues. Depending on the market for funding seems like a fine idea–until the capital is no longer there for whatever reason. By picking a company with the ability to self-fund, investors avoid that future complication, something that has stood in the way of many huge growth stories over the years.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stocks mentioned. David Gardner owns shares of Facebook. Tom Gardner owns shares of Facebook. The Motley Fool owns shares of Facebook, MTY Food Group, and Twitter. MTY Food is a recommendation of Stock Advisor Canada.

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