Five years ago, most investors didn't look twice at XPEL (XPEL -1.37%), Digital Turbine (APPS -7.46%), or Enphase Energy (ENPH -1.21%). All three were penny stocks at the time, with share prices below $2 per stub and market caps below the $200 million mark. Their daily trading volume ranged from 4,200 shares a day for XPEL to 1 million shares for Enphase.
Since we rarely cover penny-stock tickers here at The Fool, we were as guilty of ignoring these tiny stocks at the time as anyone. Enphase was the sole exception, but solar-power expert Travis Hoium's analysis back then focused on the solar power specialist's financial struggles and the rise of meaningful competition from SolarEdge and SunPower Corporation.
Things have changed since then. Over the last five years, these three stocks have produced absolutely stellar price gains, despite the raging pandemic and other marketwide challenges.
This trio of market-stompers posted the bulk of their enormous gains in 2019 and 2020. By the end of that run, they had climbed out of the penny-stock swamp, sporting billion-dollar market caps and stock prices north of $50 per share.
Let's see how these stellar returns unfolded.
A dynamic approach to turbulent target markets
Digital Turbine (formerly known as Mandalay Digital) is finding traction for its mobile advertising services. Through a combination of organic sales growth and several plug-in acquisitions, the company's full-year sales surged from $92 million in 2017 to $993 million for the last four quarters. Digital Turbine has been consistently profitable since 2020, and analysts expect earnings growth in double-digit percentages over the next five years.
The pandemic was a mixed bag for Digital Turbine. Smartphone sales slumped during the lockdowns and have remained limited due to supply chain challenges. On the other hand, the company expanded its ad-selling services into the booming video-streaming sector and signed multi-year distribution deals with the Big Three domestic wireless carriers.
So Digital Turbine made the most of its pandemic upside while positioning its weaker business for a strong rebound. Even now, the stock looks like a solid buy with bullish expectations for earnings growth and a forward price-to-earnings ratio of just 15.5.
Exploring a larger niche in a surging solar market
Enphase recovered from a multi-year slump in 2019. Solar power system prices trended downward as Chinese manufacturers flooded the market with cheaper panels. Meanwhile, SunPower turned out to be more of a valuable ally and distribution partner than a head-to-head rival. In the midst of these tailwinds, Enphase also came up with a new generation of microinverters that offers more efficient service to the customer at a more lucrative profit margin for Enphase.
Like Digital Turbine, Enphase is set up for continued success as residential solar power installations roll out globally. 4.2 gigawatts of freshly installed residential panels worked out to a 22% expansion from the previous year's existing capacity in the domestic market alone. Enphase is also finding new customers in the even more robust markets for utility-scale solar projects, opening the door to a sector with nearly 17 gigawatts of new installations last year.
However, Enphase's stock has already priced in most of these positive developments. The stock trades at a nosebleed-inspiring 42 times forward earnings and 16 times trailing sales today. Enphase doesn't strike me as a screaming buy at these prices.
Finding growth in a struggling sector
XPEL makes protective films and coatings for the automotive market. It's still a small company with $259 million of trailing sales and a market cap just south of $1.9 billion. At the same time, XPEL is successfully butting heads with sector titans such as Eastman Chemical.
Top-line sales took explosive leaps of 62% in 2018 and 63% in 2021. Earnings soared from $0.04 to $1.14 per share in the four-year period between 2017 and 2021. Even though sales of new cars have been weak in recent years, XPEL is boosting its sales through car window coatings and international expansion.
In February's fourth-quarter report, XPEL outlined exciting new growth opportunities in the form of two new car manufacturer partnerships, one of which will be the largest deal so far. On top of these upcoming launches, one of XPEL's current clients plans to double its orders in the second calendar quarter of 2022. Paint protection films are moving out of the car enthusiast market and going mainstream in a big way, and automakers see significant value in offering these coatings as an upgrade for new vehicles.
This stock trades at valuation ratios such as 25 times forward earnings and 5.7 times trailing sales, which strikes me as a reasonable value for a fast-growing business.
Image source: Getty Images.
What about the next extreme winner?
All of these big winners appear to have plenty of fuel left in the tank, and at least two of them seem to be good investments right now. However, it is not reasonable to expect five-year returns of 3,700% or more from this level. They might be able to double or triple over the next few years, but you shouldn't expect a 38-fold return.
Finding the next massive multibagger among today's small-caps and penny stocks is also a difficult prospect. For every market-beating winner, you'll find dozens of short-lived gadflies.
Instead, you should set your sights on prospective growth phenoms with more meat on their bones. For example, Digital Turbine and XPEL really started spreading their wings in the summer of 2020, while Enphase's market stabilized and started to surge in the fall of 2019. You would be looking at market-crushing returns ranging from an XPEL triple-bagger to a 700% Enphase return if you'd started building positions in these stocks when their future prospects started to become clear -- and you'd lose much less sleep over your investments along the way.
