Image source: Getty Images
Becoming a stock market millionaire with UK shares isn’t as farfetched as it seems. After all, there are plenty of investors who’ve done it before, and the number of ISA millionaires continues to grow with each passing year. However, that doesn’t mean the journey is easy, especially when taking a more concentrated approach.
Instead of diversifying across dozens of companies, a portfolio can be highly focused on a small collection of top-notch stocks. Investors lose a lot of risk protection offered by diversification.
However, the returns generated can be far superior, providing the right shares are picked. And it’s the strategy that many industry-leading investors, including Warren Buffett, use to build their fortunes.
Finding millionaire-making investments
With media headlines often covering “overnight success” stories, striving for gargantuan returns is often perceived as risky. And when it comes to unproven penny stocks with lots of potential, there’s no denying that the odds are similar to playing the lottery.
However, what often goes ignored are the long-term success stories. Boring businesses that grow consistently over time instead of surging in the short term can often fall under the radar of most investors.
In reality, these are the types of businesses that are the most likely to push a concentrated portfolio into millionaire territory, given enough time and capital.
Unfortunately, they’re also pretty rare and hard to spot. Of the thousands of businesses listed on the London Stock Exchange, perhaps less than 20 are capable of delivering millionaire-making returns, in my opinion. So the question now is, how do investors find them?
Sadly, there’s no easy answer. However, there are some tactics to quickly filter out unlikely candidates.
In the long run, stock prices are driven by the underlying businesses rather than mood and momentum. Therefore, firms with no discernible and sustainable competitive edge aren’t likely to meet performance expectations. Similarly, a terrific business model is completely worthless if the balance is crumbling under absurd levels of debt and other liabilities.
Testing for these two traits could easily wipe out more than half of UK shares from consideration. And even more can be eliminated by emphasising the need for excessive free cash flow generation. After all, this is ultimately what provides companies with the money to achieve their goals.
Is this a stock to consider?
One example from my portfolio I believe has tremendous long-term potential is Alpha Group International (LSE:ALPH). It’s a financial services firm specialising in currency risk management. And it’s also in the process of disrupting the banking sector with novel technologies.
The firm isn’t the only business attempting to disrupt the financial industry. And there’s the ongoing risk of its advantages being eroded by growing competition over time. Yet it’s managed to carve out a niche within the alternative investment space that’s translating into rapid double-digit growth across sales, earnings and, most importantly, free cash flow.
With a target market worth more than $170bn (£134bn) versus a market capitalisation of just £766m – Alpha has barely scratched the surface of its potential. Pairing this with a price-to-earnings ratio of just 12.8, the group seems to have gone largely under the radar.
Of course, there’s no guarantee it will deliver big returns. But the odds seem to be in its favour and I think it’s worthy of further research.
