How to spot a future 10-bagger share

Investors are keen to spot so-called '10-baggers' - shares which could increase in value by 10 times - but it is difficult to identify which AIM company is going to do well and sustain that share price growth. However, according to our research, it's the less risky growth companies rather than the risky mining or technology companies that are more likely to do well long-term.

The two tables below show 10-baggers over five and 10-year periods. These are by their nature random periods which do not include newer AIM companies. They do, however, provide an indication of the better performing shares.

There are software and health firms in the lists, but they are not really cutting-edge businesses. While getting into high technology and drug development companies at an early stage does provide the prospect of enormous gains, picking the right one is difficult because of a lack of fundamentals and the constant need to raise more cash holding back the share price.

The tables are for five and 10 years, but there are other AIM companies that have reached and maintained 10-bagger status. Broker Numis Corporation was one of the early AIM entrants. Share splits complicate matters, but it appears that the adjusted issue price is just over 6p compared with a current price of 245p.

Staffline is not in either list, but the share price is 15 times the level it was when the recruitment and training firm floated in December 2004.

Some past 10-baggers have been taken over. For example, pizza restaurants operator ASK Central joined AIM at the equivalent of 8.75p a share back in 1995 and it was taken over nine years later for 220p a share.

Best AIM Company Performances Over 5 Years

Best AIM Company Performances Over 10 Years

It doesn't always stay up

A 'good story' does not necessarily make a good long-term investment. Some 10-baggers do not maintain their gains, although there are always opportunities to take profits for an investor.

An example is mobile banking technology and services provider Monitise, which is being taken over at a fraction of its peak share price. By the end of 2008, the Monitise share price had fallen to 3p and in February 2014 it was around 80p - still more than four times the level when it floated in 2007.

The bid from Fiserv is 2.9p a share, which values Monitise at £70 million. Monitise raised £109 million at 68p a share back in 2014 and a similar amount had been raised two years earlier.

Monitise provides some clues to what does not make a sustainable 10-bagger. Despite signing deals with Visa and Bank of China among others, revenues were never anywhere near high enough to cover expenses or the cost of developing the technology.

A simple totting up of losses over the five years to June 2016 comes to more than £600 million, some of which comes from the write-down of intangible assets where spending had previously been capitalised.

This shows that hope only goes so far, and if there is nothing to provide a base for the share price, it can fall right back again. Illiquidity can help a share price to advance more rapidly, but it can work both ways and accelerate a fall.

Never easy

There are very few 10-baggers that have had a smooth ride over the years. Most have had some ups and downs along the way. Online retailer of antibodies and proteins Abcam is an exception because, although there have been some declines over short periods of time, these are hardly noticeable on the chart since flotation almost exactly 13 years ago.

The share price is more than 22 times the flotation price, and the value of the company has risen from £57.5 million to more than £2 billion - with some additional fundraisings to finance growth.

Tonics and mixer drinks supplier Fevertree Drinks is an example of a company that has rapidly reached and exceeded 10-bagger status. It floated at 134p a share and has soared to 1,671p in fewer than three years. This has been achieved even though the private equity backer and founders have sold shares.

Some of the share prices have fallen sharply before they have risen significantly. The Redde share price has had a particularly extreme rollercoaster ride going back 20 years, with some of the declines being extremely precipitous.

The most recent rise has been on the back of a refinancing and move from the Main Market to AIM. However, if you go back 10 years to around the peak of the share price, the decline is more than 90%.

Iomart floated in 2000 at 100p a share, but the price had fallen to below 5p by the end of 2002. In 2003 alone, Iomart was a 10-bagger as the share price recovered. The share price is currently more than 300p.

It is difficult to identify specific criteria that cover all the 10-baggers but there are some attributes that most have.

Profit and cash

It may seem obvious that profit and cash is a key element to a 10-bagger, but even companies that are apparently unexciting can end up significantly increasing in value over a long time period. On top of the share price growth these companies tend to pay dividends so the overall return is even higher.

For example, Domino's Pizza is a 10-bagger, although it is no longer on AIM, and dividend payments total more than the original issue price.

Cash hungry businesses need to raise money and that means more shares are issued on a regular basis, making it more difficult for the share price to rise. Whereas, if shares are not being issued all the time, the number in issue is limited and investors have to buy in the market to take a stake.

Share issues for acquisitions and to finance growth are fine as long as they are earnings enhancing.

M&A can be good

Some of these companies have grown organically, but many have grown by acquisition. It is said that most acquisitions don't work but these companies buck the trend.

Acquisitions can mask the true performance of a company that is doing badly, but these companies have shown they can make good acquisition choices, although there is always one or two that don't work or have to be sorted out.

Operational gearing can help

More than a decade ago, woundcare products developer Advanced Medical Solutions was a perpetual loss maker. It was edging towards breakeven, but it was taking a long time. In 2005, a pre-tax profit of £27,000 was reported, rising to £569,000 the following year. By 2016, pre-tax profit had reached £19.1 million. Revenues have grown from £12.9 million in 2005 to £82.6 million in 2016.

This indicates how rapidly profit can grow once some companies pass breakeven. Spotting companies that are getting towards breakeven with the potential to significantly grow profit on the back of growth in revenues could point to a potential 10-bagger.

Good management is important

Consistency of management has been one of the things about many of the 10-baggers. Even where there has been change the transition has been smooth.

There are some companies that have needed to change management in order to get to the next level of growth. Accesso is an example of this, where the founder was replaced with a new chief executive who has wider commercial experience. This also led to a widening of the product range through the acquisition of other ticketing technology businesses.

In the case of most of these companies' management had to widen its potential market to grow to the size it has.

Liquidity tends to be good

Most of the companies generate at least a couple of hundred bargains per month and some have thousands of share deals. Generally, it is the ones valued at less than £100 million that tend to be traded infrequently.

IHT and tax benefits

The one thing that propels many AIM 10-baggers is the tax benefits of the junior market and, particularly, inheritance tax relief (IHT). Flooring supplier James Halstead and soft drinks maker Nichols are effectively 10-baggers since they moved from the Main Market to AIM more than a decade ago.

They are good companies, but they are unlikely to get multiples approaching 30 times historic earnings on another market.

It is that shortage of shares compared with demand for investments eligible for IHT relief that helps them maintain high multiples. That is why the likes of James Halstead would find it difficult to move to the Main Market, even if it wanted to.

The eligibility for ISAs also appears to have boosted demand to some extent.

There do not seem to be any hard and fast rules, but seeking out good long-term investments is more important than assessing whether they will be a 10-bagger and being attracted by high risk investments. Many of the better companies have gone along steadily and built up momentum over time.