Finding the next great investment is a challenging task. Usually, multibagger stocks are small-cap or mid-cap stocks that can grow into large caps through years of above-average revenue growth. However, these less known companies rarely hit the news headlines. These are the stocks with multibagger potential.
To find stocks with multibagger potential, you must first identify durable secular trends. Then, identify the companies in these segments that can grow consistently. Remember, one year of growth isn’t enough. These companies must maintain exceptional growth for years.
Secondly, the starting valuation must be reasonable. Otherwise, if the starting valuation is in bubble territory, valuation compression can ruin its multibagger potential. History has numerous examples of great companies with excellent revenue growth whose stocks stagnated for prolonged periods due to overvaluation. Examples are dotcom darlings Cisco Systems (NASDAQ:CSCO) and Qualcomm (NASDAQ:QCOM), which underperformed for almost two decades after the dotcom bubble bust.
The following three companies are potential multibagger stocks. They are growing revenues by more than 30% and can sustain that growth rate due to a substantial addressable market. What’s more, they are reasonably valued, trading at a trailing price-to-sales ratio below 10.
On Holding AG (ONON)
On Holding AG (NYSE:ONON) is taking the high-performance running and outdoor shoe market by storm. The shoemaker has created a buzz by creating stylish, comfortable running shoes that consumers love.
In addition to the stylish design and comfort attracting consumers, On has also had solid marketing wins. Its brand ambassadors have won major races running in their shoes. For instance, Helen Obiri won the New York marathon running On CloudTri 1 in November. She also won the Boston Marathon earlier this year wearing the same shoes.
On has been investing aggressively and innovating in speed-enhancing technologies in its shoes. This and the winning buzz have made the sneakers a favorite among consumers. It is creating a unique experience for customers, especially runners.
Due to the high consumer interest, revenues are surging. In the third quarter, net sales increased 58% year-over-year on a constant currency basis. Given the strong performance year-to-date, management increased the full-year growth rate to 46%.
Demand for On’s footwear, apparel and accessories is soaring. 2023 has been a year of records in terms of sales and the impressive performance will continue. As the brand begins rolling out its retail store concepts, it will gain more visibility, showcase its products better and add another revenue channel. Furthermore, these stores will add incremental revenue to wholesale and e-commerce channels.
e.l.f. Beauty (ELF)
Beauty is one of the best categories to invest in. According to McKinsey, the beauty market will reach $580 billion by 2027. Based on their projections, skincare and makeup will grow 6% annually between 2022 and 2027.
Given the secular growth, e.l.f. Beauty (NYSE:ELF) is one of the best multibagger stocks to buy. It’s a fast-growing player in the cosmetics and skincare industry. Notably, e.l.f. has a massive following among teens and young adults. Indeed, the Piper Sandler Generation Z survey found it was the top cosmetic brand among teens.
Earnings have reflected this view, with the company reporting stellar earnings. Notably, e.l.f. Beauty has been outgrowing peers and taking share. On November 1, it reported Q2 fiscal year 2024 results, growing net sales by 76%. That was the 19th consecutive quarter of net sales growth.
Although the company is reporting stellar numbers, it sees more growth in color cosmetics, skincare and international. Its two leading brands, e.l.f. Cosmetics and e.l.f. SKIN are showing significant momentum.
In the quarter, e.l.f. Cosmetics sales increased 51% year-over-year in tracked channels. Meanwhile, e.l.f. SKIN grew 129%, about 13 times the category’s growth rate. What’s more, both brands saw solid share gains. Cosmetics increased share by 330 basis points whereas e.l.f. SKIN increased its share by 80 basis points.
Given the secular growth plus the momentum, e.l.f. Beauty is one of the multibagger stocks to buy. Management expects to double its share in cosmetics over the next few years. At 47 times forward earnings, ELF stock is a bargain, given the growth runway ahead.
Procore Technologies (PCOR)
Despite growing revenues by 33% in the recent quarter, Procore Technologies (NYSE:PCOR) sold off. Jeffries downgraded the stock, citing weakening demand and deal slippage. The analysts also highlighted that net new additions will be under pressure in the near term.
Amidst this pessimism, PCOR stock is one with multibagger potential. This construction management platform has a lot of growth potential. Notably, the construction industry is massive, with global construction estimated to reach $15 trillion in 2030.
Procore serves general and specialty contractors in transportation, general building, industrial, petroleum, power, manufacturing, waste and sewerage, and telecoms. Its purely cloud-based platform covers preconstruction, project execution, workforce management, financial management and construction intelligence. Furthermore, it enables integration with customers, partners and collaborators, enhancing network effects.
Today, Procore has barely scratched this market. For instance, in its primary market, the U.S., less than 12% of annual construction volume is run on Procore products. Moreover, total Procore customers represent under 2% of the total addressable market. Additionally, logo capture in the international market is under 1%, presenting a tremendous opportunity to add new customers.
The current quarter might have disappointed analysts. However, construction is a massive growing industry, and Procore has just begun penetrating the market. Notably, the company has maintained quarterly revenue growth above 30% since Q4 2021. If you focus on the long term, Procore is one of the best multibagger stocks to compound your returns.
On the date of publication, Charles Munyi had a long position in ELF and did not hold (either directly or indirectly) any positions in other securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.