The dream of every investor is uncovering the next “10-bagger” stock. While it’s tough to predict a 1,000% gainer, Zoe’s Kitchen (ZOES), DexCom (DXCM) and Palo Alto Networks (PANW) all have the right ingredients to become 10-baggers in the next several years.
Zoe’s Kitchen (ZOES)
The trick to catching a 10-bagger is to seek out rapid growth, a large potential market and a company with room for expansion. In the restaurant business, ZOES has all the important 10-bagger ingredients. ZOES now has 170 locations in 18 states, but it added 34 stores in 2015 alone, upping its total by more than 25%. The company plans on opening another 36 locations in 2016. Fast casual rivals like Chipotle (CMG) and Panera (PNRA) already have in the neighborhood of 2,000 locations each, so there’s plenty of room for ZOES to expand its U.S. presence.
ZOES market cap is currently just $712 million, but the company has increased its sales by an average annual rate of 47.6% in the past five years, according to Finviz. In the most recent quarter, revenue jumped 31.7%.
Looking ahead, EPS is expected to grow 39.8% annually through 2021. Thankfully, not all this growth is coming from opening new restaurants. ZOES reported a 7.7% increase in comparable restaurant sales in Q4 and witnessed a 2.8% increase in traffic.
If ZOES keeps on this growth track, it could easily follow in CMG or PNRA’s footsteps in the next decade.
DexCom (DXCM)
Medical device company DXCM is aggressively targeting one of the largest and most rapidly growing medical markets in the world: the diabetes market. DXCM’s continuous glucose monitor sales skyrocketed 54% in 2015. DXCM is averaging 52.6% annual sales growth in the past five years and it projected to deliver annual EPS growth of 32.5% in the next five years.
The company is aggressively pursuing growth, including plans for a new factory, a higher R&D budget and expansion into Europe in 2016. DXCM also made sure to be well-positioned as one of the first apps available on the Apple (AAPL) Watch when it began shipping in 2015.
Despite the major headway the company has made and its prime diabetes market positioning, DXCM’s market cap is still only $5.4 billion, and its customer base only represents a tiny fraction of the addressable global market. If DXCM continues to execute its rapid growth strategy, early buyers could soon be enjoying a 10-bagger.
Palo Alto Networks (PANW)
With a share price of around $140, a fair amount of media/analyst coverage and a market cap of $12.4 billion, PANW may seem like an unlikely 10-bagger from here. However, the cybersecurity market is huge and getting bigger every day, and Palo Alto is well-positioned as a market leader and has all the growth signals that investors look for in a big gainer. The company recorded staggering annual sales growth of 80.3% over the past five years and is expected to grow earnings by 43.6% annually in the five years ahead. Perhaps most importantly, the company reports that, while PANW currently only maintains about a 7% market share in the Internet security market, it is capturing about 43% of the market growth.
This prime positioning is one of the reasons Bernstein declared PANW “the most likely winner of the infrastructure security race” in March and sees about 30 percent upside to the stock in the next year alone. If PANW continues to dominate the cybersecurity business, patient shareholders could see a lot more than 30% upside in coming years.
Disclosure: As of this writing, Wayne Duggan had no positions in any of the stocks mentioned.
