About 10 years ago, an investor could have purchased 100 shares of Apple (Nasdaq: AAPL) for $1,200. Today, those same shares are worth an extraordinary $675,000. Not counting dividends, that’s a better than 56-fold return on your investment in just 10 years. An investor savvy enough to recognize Apple’s potential at that time could be comfortably enjoying an early retirement now, thanks to the returns from just one stock.#-ad_banner-#

Of course, meteoric gains like Apple’s are extremely rare. Just ask legendary investor Peter Lynch, who spent his career as manager of Fidelity’s Magellan fund searching for multi-bagger stocks that could drive extraordinary portfolio returns. Lynch considered himself fortunate to have uncovered a handful of multi-bagger stocks during his career, including Ford (NYSE: F), Philip Morris (NYSE: PM) and General Electric (NYSE: GE).   

My strategy for discovering the next multi-bagger begins with finding companies with fundamentals similar to Apple. The business should have exceptional growth rates, superior profit margins, a pristine balance sheet and a sustainable advantage that competitors just can’t match. I look for advantages resulting from a proprietary technology or market-leading brand. 

And that’s how I came across another technology stock — Acacia Research (Nasdaq: ACTG). 

Not only is Acacia more profitable than Apple in terms of profit margins, but the company has higher rates of revenue and earnings growth, a debt-free balance sheet and extraordinary growth prospects, as many analysts have declared.

Like Apple, Acacia profits from proprietary technology, but uses an entirely different business model. Acacia doesn’t invent technologies. Instead, the company partners with inventors, helps them license their patented technology to corporate users, then shares the revenue 50/50. In doing so, it’s been able to generate more than $765 million in revenue to date. And while that’s nothing compared to the $148 billion Apple brought in last year, it’s still quite a lot for a small-cap company. 

One of the main services Acacia offers its inventor partners is protecting their patents from infringement by securing licensing fees from users or enforcing the patent in court.   

When Acacia was founded 20 years ago, the company worked mainly with individuals, small companies and university think tanks to commercialize and protect their patents. Today, Acacia owns or controls the rights to about 200 patent portfolios across a variety of industries. The company has successfully completed more than 1,150 licensing agreements covering 125 technologies.  

From its roots as a partner of small businesses, Acacia has rapidly gained critical mass and evolved today into a licensor of patents to Fortune 500 companies. Acacia hit a home run in 2010 when it negotiated a three-year deal to license its portfolio of patents to Oracle (Nasdaq: ORCL) for $25 million. Six months later, Acacia signed a similar licensing agreement with Microsoft (Nasdaq: MSFT), resulting in a $40 million pay day. Last year, another licensing arrangement was secured with Samsung (SG: SSU), a deal worth $45 million.

Already in 2012, Acacia has announced major licensing deals with Cisco (Nasdaq: CSCO) and Hewlett-Packard (NYSE: HPQ). All in addition to a constant stream of profitable litigation settlements with smaller companies and a few larger ones, including recent settlements with Commerce Bancshares (Nasdaq: CBSH) and Citigroup (NYSE: C).

This series of large structured licensing deals has created considerable momentum for the company’s revenue and earnings. Acacia has nearly tripled its revenue in the past two years from $67 million in 2009 to $185 million in 2011. Even better, revenue vaulted nearly 50% to $150 million in the first six months of 2012 from $100 million in the same period a year ago.

Growth in earnings per share has also been impressive. From net losses in 2009, earnings grew to 51 cents a share in 2011 and have soared to $1.88 a share during the first half of this year.

Investors love technology stocks for their hefty profit margins (the amount of profit earned as a percentage of revenue). And Apple has been one of the most profitable. The company posted a 27% net profit margin on $148.8 billion in revenue for the trailing 12-month period ended in June. Little Acacia, however, has beat Apple, generating a 28.5% net profit margin on $220.9 million in revenue during the same period.

So while Apple clearly makes more in total profits, Acacia is actually beating out Apple in terms of margins, meaning it’s earning slightly more on each dollar of revenue. And if a company is able to beat out one of the most successful technology companies in history in this department, then it’s definitely worth a further look.

Analysts also expect Acacia to expand profits exponentially in the future. Consensus analyst estimates look for 38% average annual earnings growth from Acacia in the next five years. This is much faster profit growth than Apple, which analysts say will deliver 22% annual earnings gains.  

The quality of Acacia’s balance sheet also rivals Apple. Apple has no debt and cash of $29.50 a share, which is 4% of the stock’s $660 share price. Acacia has no debt and cash of $8.64 a share, which is roughly one-third of its current $27 stock price. The company can’t compete with the $622 billion market clout of Apple, but Acacia is no slouch either, with a smaller but respectable $1.3 billion market value.

Risks to Consider: Acacia’s business model, which focuses on large structured deals, has made revenue and earnings growth somewhat erratic. However, the longer-term trend is favorable, showing revenue growth of 33% a year in the past five years.

Action to Take –> There is an opportunity right now to buy Acacia shares at just 8.9 times forward earnings. This is a huge discount to the stock’s five-year average price-to-earnings multiple of 30. Acacia’s share price recently plummeted from $42 to hit a low of $24 before rebounding to $27. The price decline was triggered by Apple’s patent fight with Samsung, which had investors worried that Samsung’s defeat would hurt Acacia. 

But the case didn’t involve any of the patents Samsung licenses from Acacia. On the contrary, Apple’s patent defense victory should be seen as also a win for Acacia, since it reinforces the value of Acacia’s patents. That should ultimately be good for the company’s earnings and share price.