How everyone can make money as a stock scout

Five tips for tracking winner stocks    

Walk around with open eyes in everyday life  

The next stock-price multiplier may be waiting at every corner. A trend scout is therefore always active. Be aware what products and services you prefer and what other people like. Invest in what you know and understand. Visiting shopping malls can be a treasure trove. Trust your instincts. 

Dare to ask  

If you find an interesting investment idea, make inquiries directly at the company. Go to the shops, talk with vendors and customers and test the products. Also, investor relations departments are helpful as an information source. 

Make use of your personal environment  

Ask what others think about a particular company or a particular product. Ask friends about promising companies in their areas of expertise. This will help expand your range of action. 

Be patient  

Potential stock price multipliers will not show up every day. But this is not a problem. A ten-bagger ever year would be sensational, so keep your eyes open for the right opportunity. 

Let the stock develop its potential  

If you have found a jewel, the stock price may rise higher than you think. Free yourself from price-target-thinking and let profits run. But remember: Not every idea meets all expectations. Therefore, never fall in love with a stock.   

Stocks with multiplying potential are every investor’s dream. With some easy rules, this dream can quickly become reality. Here are some examples of how every private investor can become a scout for stock price multipliers. 

Shares are known to be the best long-term investment, but despite this generally accepted knowledge, many people are still on the sidelines. 

That is strange given that finding promising shares is easier than many people think. Lack of professional knowledge is no excuse. Rather, everyone has the ability to find lucrative investment ideas. The only requirement is the willingness to march with open eyes and ears through everyday life. 

The basic idea behind this thesis is easy:  

Every day we all come in contact with many products that bring excellent business prospects to their producers. This alone makes the shares of the manufacturers a potential price multiplier. But the stocks of these companies do not end up in the portfolios as often as they should. This article will show how this can change, and how any investor searching for winning stocks can become a “truffle pig.”   

A prime example  

A prime example for a stock-price multiplier is Apple. The triumph of the iPhone and iPad was easy to follow and for invested shareholders, almost a license to print money. Since the introduction of the first Apple smartphones in early 2007, the share price has increased almost tenfold.  

Another reason Apple is a good example is because the company proves the old prejudice to be wrong: that it might be too late if an investor strikes a megatrend relatively late. Anyone who invested in 2011 – four years after the iPhone’s launch and perhaps inspired by the observation that the flashing lights of iPhones replaced lighters at rock concerts – has since doubled the capital invested.  

Even now the further prospects can be described as good, since new products such as the Apple smartwatch or Apple Pay have the potential to be best-sellers. For stock scouts, Apple certainly should remain on the radar screen.   

Diligent research pays off  

A terrific example of how private investors can skim the stock market with “truffle pig” instincts is the development of Pandora. The Danish jewelry manufacturer fell suddenly and massively in 2011 after weak quarterly figures raised doubts about its business model.  

But the wrists of many women still glittered with many beautiful Pandora bracelets, and interviews with Pandora customers quickly showed the continued popularity of the products offered. Visits to branches at that time also showed that many customers still came into the stores. Also, the managers in each visited shop reported continued strong demand, a further sign that the rumors about a no longer functioning business model did not make sense. Whoever was playing stock scout at that time was rewarded with a tenfold stock price increase. 

The Pandora story certainly would have been to the liking of Peter Lynch. The former Fidelity star fund manager tracked down with great success so-called ten-baggers. During his time from 1977 to 1990 as head of Fidelity Magellan Fund, he achieved an annual average performance of 29.2 percent. This was almost twice as much as the 15.8 percent increase in the S&P 500 Index.  

To date, Lynch is honored for this achievement as an investment legend, and his first-class reputation is kept alive by the three books he has written about his investment style. There are not too many books a private investor must read, but Lynch’s “One Up on Wall Street,” “Beating the Street” and “Learn to Earn” are definitely three on the list. All three explain how a private investor can successfully navigate through the equity markets alone. 

In keeping with the spirit of this story, Lynch was certain that laymen can beat the market. That the concept still works today is shown in a portfolio managed by Justin Carbonneau and based on Lynch’s investment principles. Since its launch in July 2003, the portfolio has returned 11 percent. The S&P 500 Index has simultaneously achieved a considerably smaller increase of 6 percent.  

“Over the long term my Lynch-inspired model has had its ups and downs, but if you’ve stuck with it, it’s paid off,” summarizes the partner of Validea Capital Management.   

Shopping malls a perfect playground   

The two cases presented above prove beyond doubt how timely the investment style made popular by Lynch remains today. To find more winner stocks is easy, especially in the U.S. The big home market there helps to build up nationally successful chains, which afterward also can conquer world markets. To identify such companies, you only have to take a plane to Florida. The best hunting grounds are the big shopping malls, since there are many different shops that can be checked during one stop.  

In the malls it is easy to see the success of such companies as Starbucks, L Brands (Victoria’s Secret), Fossil, Michael Kors and Foot Locker. Look around some more and you will see how popular video games are, or how the demand for organic food is constantly growing. That makes companies like the video game developer Activision Blizzard or the natural- and organic-food grocer Sprouts Farmers Market interesting. 

One problem, however, is the often high valuations of shares of companies with popular products. In order not to pay too much, it makes sense to watch for the price earnings growth ratio, as Lynch did. The rule of thumb is that a stock is not too expensive as long as the earnings growth rate is higher than the price earnings ratio.  

But the very first step is to develop an instinct for companies with multiplier potential.