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£5k to invest? I’d buy multibagger stocks with big upside potential

In 1977, Peter Lynch took charge of the Magellan Fund at Fidelity Investments. When he left in 1990, he had averaged an impressive 29.2% annual return, making it the best performing mutual fund in the world at that time. People said that he wouldn’t be able to keep it up as the fund would get too large, yet assets under management grew to $14 billion from a meagre $18 million.

Peter Lynch rivals Warren Buffett for his levels of success. But Peter achieved this return despite the 1987 crash and also despite owning hundreds of stocks. So what was the secret to his success?

Multibagger stocks

A ‘multibagger’, as coined by Peter Lynch, is a stock that increases more than 200%. The phrase comes from baseball, and a 10-bagger stock gives 10 times the return on investment – an event most investors dream of happening. But they are real – and the next one may be sitting right in front of you.

Peter Lynch was famous for finding small-cap growth stocks, which had huge potential in a roll-out. His theory was that if the product or chain was successful in one state, then it could be successful in another, and another, and eventually rolled out to all 51 states in the USA. This provided huge growth potential upside, and Peter Lynch loved to try and sniff these stocks out before the so-called ‘smart money’!

How to find a multibagger

Peter Lynch loved to find multibaggers whilst taking his daughters to the mall. He’d look at what shops they visited, because behind every stock is a story.

Here’s some UK examples: Fevertree had its IPO in November 2014 at 170p, and last year hit heights of over 4,000p. That’s a return on investment of over 23 times.

Or what about Games Workshop? At the start of 2017 the price was below 750p – it’s currently above 5,600p. That’s a return of over seven times – or a seven-bagger.

Peter Lynch was an expert in finding multibaggers, and in his stocks he looked for:

  • Management that were aligned with shareholders and not wasting cash;
  • Regular rises in earnings per share;
  • Large potential market for growth.

Two stocks that could be UK multibaggers

D4T4 Solutions (LSE: D4T4) is already a multibagger, but at a £90 million market cap I think it could go a lot further. The company’s prime product, the Celebrus platform, captures customer behaviour. The platform monitors where the customer’s mouse goes and clicks when visiting websites that are signed up. This allows companies to make better decisions. It’s already profitable, and it’s growing its earnings too.

The second stock to watch out for is Rockrose Energy (LSE: RRE). It’s already up 200% in 2019, but it trades on a low price-to-earnings multiple, and has its full market cap covered by cash. This means that the profit-generating assets are in the price for free! It’s not without risk, but with the executive chairman owning 28% of the company’s stock, he has a big reason for the business to succeed further.

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Michael Taylor has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.