Hunting for “10 baggers” – how the UK beat the US
It may come as a surprise that the UK has a greater share of stocks which have delivered 10-fold returns, or more, in the past decade.
The ups and downs of US technology stocks dominate headlines. Before this year’s tech correction it would have been hard to miss the news, for instance, that Apple’s market capitalisation had exceeded $3 trillion. That was not too far short of the entire value of the UK stock market.
What is less well known, however, is that over the past decade you’d have had a better chance of picking a “10 bagger” in the UK than the US (see table below). Coined by highly successful American investor Peter Lynch the term describes a stock which has delivered 10-fold returns.
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested
We’ve found 63 UK companies to have achieved this over the past 10 years. Each generated a total return (share price gain plus dividends) in excess of 900%. This was based on having bought them at the price they ended 2011 (or for new companies their “issue” price) and held to 31 December 2021.
That’s equivalent to a 6.9% share of UK stocks versus 5.7% in the US. The companies include athleisure fashion retailer JD Sports, online grocer Ocado and research and data analytics business YouGov, whose shares are traded on the Alternative Investment Market (AIM) market.
The UK is often bemoaned as being an “old economy” stock market dominated by shrinking banking and oil sectors, rather than the more glamorous information technology (IT) companies, for example.
The average UK 10 bagger, however, grew its top line at a compound annual growth rate of 12% in the past decade. Only one company saw revenues decline - Jet2, the package holiday provider, as a result of the coronavirus pandemic.
Sales growth was the second-largest driver of total returns – these are not companies whose shares have simply re-rated in line with investment fads.
And the 63 come from a variety of areas, with good representation from the industrials, consumer discretionary and financials sectors in addition to IT. Perhaps most importantly from the perspective of investors, they have grown profitably – expanding profit margins was the largest driver of returns.
These companies also tell us that dividends are not necessary for maximising returns (they were only a marginal component of total returns).
The lesson? Company managements with opportunities to invest at high rates of return should prioritise internal investment, or perhaps acquisitions, over dividends.
While there are many examples of ill-conceived acquisitions destroying value, just under half of our 63 made significant acquisitions in the decade. So, there are UK companies able to properly value targets and deliver those elusive synergies.
They include pest control business Rentokil, equipment hire group Ashtead, specialist engineer Halma, and JD Sports.
All four of these names, which have risen to become constituents of the FTSE 100, have made excellent use of acquisitions, to help generate great returns for investors in the past decade.
Any reference to sectors/countries/stocks/securities are for illustrative purposes only and not a recommendation to buy or sell any financial instrument/securities or adopt any investment strategy.
Issued in the Channel Islands by Cazenove Capital which is part of the Schroders Group and is a trading name of Schroders (C.I.) Limited, licensed and regulated by the Guernsey Financial Services Commission for banking and investment business; and regulated by the Jersey Financial Services Commission. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.