3 stocks that I expect to generate 10x returns in my portfolio
Ohen it comes to investing, some people like to focus on the stock picking aspect. I see investing as an exercise in patience. I am well aware that not every company I buy will be winners. In fact, 13 of the 39 stocks held in my portfolio were below my cost basis, as of March 25.
However, I also know that winning stocks tend to keep winning over time. That’s why my biggest stake gained almost 1500% over my cost base and can more than offset all my unrealized losses many times over. All it takes is a few 10X returns to really turn an investment portfolio into something great over time.
Of the 39 stocks currently in my portfolio, there are three that I expect to generate 10X returns or even better.
The first stock that I think has incredible upside potential is a cloud-based ad tech company PubMatic (NASDAQ: PUBM). PubMatic is a new addition to my portfolio, with three separate purchases between March 7 and March 14. With a base cost of $19.72, I actually expect this to become a $200 stock at some point in the future.
The main catalyst for growth is the steady shift of advertising spend from print to digital formats. PubMatic is a sell-side provider within the programmatic advertising space. In English, it simply means that it sells display space to publishers. Interestingly, however, PubMatic does not always fill the display space with the most expensive ad. Rather, the company’s machine learning algorithms seek to place the most relevant content in front of users. This way, advertisers stay satisfied and publishers gain more pricing power over time.
Another thing to note about PubMatic is that it has built its infrastructure based on the cloud. Without having to rely on third parties, the company is starting to see the fruits of its investment pay off. Thanks to scale-based efficiency, gross margin climbed to 74% in 2021, with operating expenses as a percentage of total sales falling to 48% from 61% two years ago.
Plus, PubMatic crushes expectations. While global digital ad spend is growing at a low double-digit percentage annually, PubMatic recorded a 49% organic growth rate last year. Over the next two years, the company should be able to double the average industry growth rate, thanks in part to rapid growth in mobile and connected TV ad spend.
PubMatic is profitable on a recurring basis and is expected to grow 20% per year for what seems like many years to come. It is perfectly positioned to take advantage of the migration of ad dollars away from print.
The second stock that I’m sure can generate 10x returns in my portfolio is a dog-focused products and services company To bark (NYSE: BARK). Bark is one of the aforementioned 13 stocks that I am currently underwater on. However, if the stock hits around $70 at some point in the future – a figure I’m perfectly comfortable with in this business – I’ll have multiplied my cost base by 10 times.
The number one reason I consider Bark an obvious buy has to do with the ownership stats and dollar numbers that support the pet industry. According to the American Pet Products Association (APPA), the percentage of American households owning a pet has increased from 56% in 1988 to 70%, according to its 2021-2022 survey. That equates to over 90 million American households, 69 million of which are said to have a dog.
Additionally, an estimated $109.6 billion was spent on pets last year. Year-over-year spending on pets has been declining for at least a quarter century. This means that not even the dotcom bubble, the Great Recession or the COVID-19 pandemic could stop pet owners from opening their wallets to their furry family members.
What makes Bark so special is the company’s direct focus and innovation (DTC). As for the former, Bark ended December 2021 with 2.3 million active subscribers and 84% of its fiscal third quarter sales came from its DTC segment. The fact that such a large percentage of its sales are tied to subscription services helps reduce its overhead. As a result, Bark has consistently produced juicy gross margins between 55% and 60%.
In terms of innovation, the company introduced a number of new services during the pandemic. This includes Bark Home, which provides necessities like beds, leashes and collars, as well as Bark Eats, which works with owners to develop personalized dry food diets for their pooch. The key point being that cross-selling opportunities have increased.
If Bark can continue to grow 20% to 30% per year, I don’t see him having a problem becoming profitable and generating 10X returns in my portfolio.
The third stock on which I fully expect to generate 10X returns in my portfolio is a furniture company Lovebag (NASDAQ: LOVE). This is a bit of a cheat given that Lovesac is already a little more than halfway there (my cost base is $8.26). But based on the catalysts I’ve seen from this company and its management team, a 20X return (i.e. a stock price of $165) could be quite reasonable.
In general, there’s no better way to put your friends or family to sleep than to say the words “furniture stock.” The furniture industry relies heavily on foot traffic at physical outlets, and many of these outlets source from the same small group of wholesalers. What Lovesac does is innovate on the furniture front and dazzle with its omnichannel sales platform.
Although some people may know Lovesac from its pouf-style chairs (called “sacks”), the company generates approximately 85% of its revenue from the sale of sactionals. A sactional is a modular sofa that can be rearranged dozens of different ways to fit virtually any living space. There are approximately 200 different choices of machine washable covers for sactional buyers to purchase, which means every color or theme in a home can be matched. Plus, the yarn used in these blankets is made entirely from recycled plastic water bottles. As I’ve pointed out before, customers get functionality, choice and environmental friendliness in one unique product.
Equally important has been management’s willingness to change the company’s sales strategy during the pandemic. While most furniture stores were crippled by a significant reduction in foot traffic, Lovesac was able to shift almost half of its sales online. Relying on DTC sales, as well as partnerships and pop-up showrooms, has allowed Lovesac to reduce overhead. The end result was that the company achieved recurring profitability two years ahead of Wall Street forecasts.
I know it’s just “furniture”, but Lovesac offers products that no other company has yet to match. This makes it a good bet to continue growing at 20% or more per year for years to come.
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Sean Williams owns Bark Inc., PubMatic, Inc. and The Lovesac Company. The Motley Fool owns and recommends PubMatic, Inc. The Motley Fool has a Disclosure Policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.