When I first started learning about the stock market, people like Warren Buffett, Peter Lynch, Seth Klarman and Jim Simons were like the ‘Gods of Investing’. I looked up to them (and still do), and wish I could find great stocks like they did. For those who are unfamiliar, most of them returned almost double the index consistently for more than a decade, in different periods of course.
Naturally, I knew I had to put in the work to find the stocks that were good. And I was willing to. Plus I had I guess decent accounting knowledge as an Accountancy undergrad (now graduate kek).
But the problem was, I didn’t know what to look for. And as a logical person, I wanted a framework, a checklist that I could tick off as I read up about companies to determine which was the one to dump my life savings into. But of course, as we all know, that doesn’t exist. Every company is different and must be evaluated within the context of their industry and environment.
All of this searching led me down to 100 Bagger by Christopher Mayer, a book written specifically to understand the similarities between companies which have gone up 100x in stock price at some point in their life.
Let’s jump into some of the overarching principles in finding 100 baggers! Of course, do note that reading this article is no substitute for reading the book, which you can get here on Amazon!
In this book, Mayer repeatedly refers to the characteristics that he terms as the twin engines for 100 baggers. The twin engines are Sales Growth and Multiple Expansion.
Sales Growth is easy enough to understand. This just meant that Sales had to be increasing. Generally, as you might expect, faster sales growth is better (within limits). When comparing with competitors, it is also ideal if the company is growing faster than its competition.
Multiple Expansion, on the other hand, is slightly more complex. Multiples refer to ratios which investors use to value a company. Some common ones are Price to Earnings (P/E), Price to Sales (P/S) and Price to Free Cash Flow (P/FCF). A multiple expansion, therefore, refers to an increase in these multiples.
An example given in the book, Monster Beverage, the producer of the famous Monster Energy drink, is one example of a 100-bagger (surprising? I thought so too!). Monster Beverage began their turnaround in 2001, with a Earnings Per Share of a mere 4 cents and a P/E of 10. Due to the success of the Monster Energy drink, by the end of 2006, Monster had $1 per share in earnings and a P/E of 50!
Earnings went up 25 times, but the P/E went up 5 times as well, causing a 125x increase in stock price. And in just under 6 years no less.
As such, Mayer tells us to watch the trend of sales or earnings growth to find stocks that are doing well and that are trading at low multiples, giving them room to burst upwards.
Return on Equity
One of the key factors of any company we invest in is management. These are the people who make the decisions and adjust the sails of the company that you’re putting your money on.
Now, assessing management is definitely no easy task of course. It is highly subjective and relies a lot on each investor’s mindset as well. For example, looking at Apple CEO, Tim Cook, some might think he’s great as Apple has progressed steadily under his charge, while many others feel that he is not as visionary or innovative as his predecessor, the late Steve Jobs.
However, an objective way to observe this would be through numbers, or rather metrics. The one which Mayer highlights, is Return on Equity (ROE). This measures the value generated using the equity (assets less liabilities) available to the firm. In essence, we are looking at the management’s ability to create value for its shareholders.
This also helps to build conviction in times of doubt when stock price is falling by focusing on the performance of the underlying company. In this book, Mayer advocates for ~20% or higher ROE as good, ideally coupled with high revenue growth as well.
Lastly, moats are ESSENTIAL to finding 100 baggers.
A moat is a characteristic of the company, that allowed it to fend off competition to sustain their higher than average returns. This could include a strong brand name (Coca-Cola), unbeatable cost (Interactive Brokers), network effect (Microsoft), or simply being the biggest (Walmart).
The average time taken for 100 bagger to be realised was 26 years. And for a company to do well for so long, it must have a moat to ensure that it can maintain its competitive position instead of losing market share over time to faster and better competitors.
This is also one of the things that Warren Buffett always talks about and is always searching for in the companies he invests in. I guess that’s why he chose Coca-Cola and Apple as some of his core investments in Berkshire Hathaway (which mind you, was also a 100 bagger).
These 3 points that I’ve shared today are only the tip of the iceberg however. The book goes into greater detail of each of these as well as various other considerations such as CEO assessment, stock buybacks, precautions to take as well as a strategy to grow your own 100 baggers.
What I really love about the book is the large number of case studies they provide. From Amazon to Harley Davidson to Adobe and Electronic Arts (Yes, that EA), 100 baggers come from all industries and sectors and are all around us.
For such a short book, it is certainly packed with information and in an easy to digest manner. If you’re keen to pick up a copy, look no further and get yours on Amazon here!