Peter Lynch, a fund manager, first coined the term “10-bagger” to refer to stocks that have multiplied tenfold in value. Christopher Mayer, co-founder of Woodlock House Family Capital and portfolio manager, wrote a book about 100-baggers.
Mayer’s book 100 Baggers examined every company that paid $100 for every $1 it invested between 1962-2014. This survey was based on a similar study by Thomas Phelps (stockbroker and investor). It found 365 companies. Phelps also found the same number 100-baggers in 1932-1971, as reported in his book 100-1 in the Stock Market.
Here are the 10 Things I Learned from 100 Baggers: Stocks That Returned 100-to-1, and How To Find Them.
1. To become a 100-bagger, a company must experience sustained high growth.
A company should be able to sustain growth in all areas, including revenue, margins and earnings per share (EPS). To expand internationally or domestically, companies should have clear growth drivers. They don’t always have to be able to dominate a large market. According to Mayer’s survey, it took companies 26 years to reach 100-bagger status. Between 16 and 45 years, approximately 300 companies reached 100-bagger status.
A 100-bagger is possible by increasing the P/E ratio and increasing EPS growth
What do you do if a stock’s price/earnings grows to an alarming level? Mayer’s book offers a variety of opinions about what to do when stocks have a high P/E.The ratio and concluded that investors should not be reluctant sellers. It all boils down to whether or not your investment thesis in a company’s fundamentals is valid, and if you can still sleep soundly at nights when a stock goes high overvalued.
A small company can grow 10-20 times, and still have potential for growth.
This makes it easier for smaller companies to become 100-baggers than larger companies. Mayer said that the median revenue of the 365 companies was approximately $170 million, and their median market capitalisation about $500 million at the beginning of the study.
Sometimes we have to look beyond the earnings.
Amazon, for example, has been spending a lot of money on research and development (R&D), which has reduced its earnings over the years. It spent $1,050,000 in 2017.$22.6 billionThe highest R&D expenditures in the U.S. Although it could have cashed out on its earnings but chose to reinvest in the future. Amazon is now one of the most successful companies in the world and has earned its shareholders multi-fold returns ever since it was listed.
Hold on to right
Mayer says that “one who buys right must be still in order for him to run fast.” Mayer illustrates this idea by using a coffee can portfolio. This is simply buying the top stocks and keeping them for ten years. An investor can be protected from market noise and emotions, as well as volatility that could cause them to trade in the wrong places. Mayer suggests that we should focus on our best ideas and not have too many stocks in our portfolios.Ideal situations would have 10-20 stocks to spread your risk.
A company requires a high level of consistencyReturn on EquityTo compound its capital to become a 100-bagger.
A company that distributes a dividend has less capital available to invest for future growth. High-growth companies are more likely to pay no dividends and instead reinvest their earnings to grow.
Over a long time, owner-operator businesses tend to outperform broad stock markets.
.Joel Shulman, Erik Noyes and others conducted a 2012 study that showed that the index outperformed companies owned by billionaires by 7% each year. Owner-operators who have a significant ownership stake in a company are more likely to align with shareholders. A high level of insider ownership can also protect against fraud. Competent owners-operators who have good capital allocation skills tend to take on more debt and use additional cash during recessions when there are good opportunities.
Lane Five Capital Fund Manager.
Mayer cited Matthew Berry’s study, who was a Lane Five Capital fund manager. He stated that companies with high gross margins tend to maintain high margins while companies with lower gross margins stay low. These results suggest that companies with high gross margins are more resilient than their competitors and are more likely become 100-baggers.
The 100-bagger population appears to favor no one industry. It includes retailers, beverage markets and food processors as well as technology firms.
Mayer recommends that you stick with more established companies in stable sectors with long runways for growth. 100-baggers require time to grow. The chart below shows that the average company’s life expectancy on the S&P Index is decreasing.