2 Stocks With Multibagger Potential

Akorn (NAS: AKRX) has been a seven-bagger for me in the past three years, skyrocketing from $2 to more than $15. I couldn't have predicted that soaring performance, but the lessons I learned from Akorn's out-of-this-world return can help you find investments with multibagger potential.

Back when this generic-drug maker was struggling and priced below $2, it had a negative net income and shrinking margins. But for the past several years, Akorn's bottom line has grown, and its stock price has followed. The lesson I learned is that struggling companies don't always disappear; often they're just waiting to make a comeback.

Using Akorn as a model, I built a screen to identify companies that have shifted from being unprofitable to making big bucks, with opportunities to continue growing that profit in the future. I also looked for improving margins, which indicate a competitive advantage and efficient cost-management.

The criteria I looked for:

  1. Net income transition from negative to positive within the past two years.

  2. Revenue growth of 10% or greater.

  3. Positive cash flow from operations.

  4. Gross margin improvement for the past two years.

  5. EBITDA margin improvement for the past two years.

And the frontrunners are...


Market Cap (millions)


Electronic Arts (NAS: EA)


Home entertainment software

Pebblebrook Hotel Trust (NYS: PEB)


Hotel REIT

Aruba Networks (NAS: ARUN)


Communications equipment

Zillow (NAS: Z)


Real-estate services

Source: S&P Capital IQ.

In reality, I can't expect these to follow Akorn's astronomical trajectory, but they have fuel to grow nevertheless. Let's see who's ready for takeoff and who needs to run additional tests.

Grounded for maintenance
Electronic Arts:
In this video, fellow Fool Eric Bleeker notes that the video game industry is in a fight for survival. Although he gives credit to EA for trimming its gaming lineup, Eric notes that the entire industry is still trying to figure itself out. It appears EA is ripe for a turnaround, earning a profit last year and growing revenue by 15%. But I would avoid this company until it has proven its staying power and energy for continued growth.

Pebblebrook Hotel Trust: The hotel industry is tied to the overall economy and to higher oil prices, which might spook travelers. However, what is promising -- and the reason Pebblebrook matched the given criteria -- is that it started buying these (mostly unprofitable) hotels in 2010. Under Pebblebrook's CEO Jon Bortz and the rest of the management team, the hotels are already pushing their profitability higher, from a $6 million loss in 2010 to a $15 million gain in 2011. I would like to believe that the more time Bortz and the rest of the Pebblebrook team have with these hotels, the more profitable they will become. However, because a REIT has to pay out 90% of its taxable income, rather than getting to reinvest profits in new lucrative business opportunities, I do not see Pebblebrook soaring at Akorn's pace.

On the launch pad
Aruba Networks:
Aruba provides solutions that help IT departments deal with the "BYOD" (Bring Your Own Device) trend, helping employees securely connect locally and remotely to corporate networks. Concerns over falling IT spending have hurt many players in this industry recently, but I think there's growth potential in the enterprise mobility segment as more employees connect their tablets and smartphones to their employers' networks. Aruba's focus on mobile connectivity has positioned it to thrive with the BYOD trend. Most of the battle, however, will be with juggernaut Cisco Systems. If Aruba is able to prove to the market that it can not only continue to compete with Cisco, but take hold of the mobile connectivity market and continue to grow revenue by more than 30% as it did in 2011, the sky is the limit for this stock.

Zillow: Now here is a company that is growing. Zillow just had its sixth consecutive quarter of 100%-plus year-over-year growth. There's still more growth potential from its new mobile platform and the move into the rental marketplace with its recent acquisition of RentJuice. Despite this growth, the stock has been punished lately, probably due to its sky-high P/E ratio of around 250. However, with a market cap of $1 billion, I still see Zillow having plenty of upside potential, and continued growth might be able to justify that P/E.

The sky is no limit
There is no telling if -- or when -- these stocks will take off, but there's also no limit to how high they can go. If you're interested in learning more about the companies above, add them to your own personal watchlist by clicking the corresponding link.

As I mentioned above, Aruba is well-positioned to take advantage of the coming mobile revolution -- but it's not alone. To discover another company poised to capitalize on our collective shift to on-the-go computing, grab a free copy of our special report, "The Next Trillion-Dollar Revolution."

The article 2 Stocks With Multibagger Potential originally appeared on Fool.com.

Foolish internNick Pugleasaowns shares of Akorn at the time of publication. The Motley Fool owns shares of Cisco Systems, Pebblebrook Hotel, and Zillow.Motley Fool newsletter serviceshave recommended buying shares of Pebblebrook Hotel and Zillow. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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