100 Baggers – Stocks that return 100-1 and how to find them
Since reading this exceptional book we have developed a friendship with Chris Mayer the author. Not only has this book helped form large parts of our investment process it has also led us indirectly to some of our best investments. We think this is a very high-quality study of stocks that have been the ultimate quality compounders in history.
Summarised takeaways
The biggest hurdle to making 100x may be the ability to stomach the ups and downs and hold on
Growth, Growth and Growth are what power big movers
SQGLP, Small in size, Quality Mgt and Business, Growth in earnings is high, Longevity in Q&G, Price is favorable
“it is management alone which is the 100x alchemist and it is to those who have mastered the art of evaluating the alchemist that the stock market rewards with gold”
To make 100x in a stock you need Vision to see them, Courage to buy them and Patience to hold them – patience is the rarest of the three!
There is no amount of security analysis that is going to tell you a stock can be a 100-bagger. it takes vision and imagination.
Be a reluctant seller as Phil Fisher has said “the time to sell is – almost never”.
Owner Operators – Skin In the Game
“Entrepreneurial instinct equates to sizeable equity ownership”
“Over the long term, returns for shareholders will be determined largely by the decisions the CEO makes in choosing how to allocate capital”
5 tools in the capital allocation toolkit
1) Invest in existing business operations,
2) Buy other businesses,
3) pay down debt,
4) buy back stock or
5) pay dividends.
There is a 6th which is to retain it but this is a deferral not a decision.
The 100 Baggers of the last 50yrs
The median market cap was $500M
The median price to sales ratio was 3x
The average time to reach 100baggerdom was 26yrs.
In 2001 annual report they made clear they are focused on carbonated drinks, in particular, energy drinks.
Monster and Rockstar both entered the category at about the same time in the 16oz niche. Monster recognized and seized on the opportunity. From 2002 to 2004 Monster grew revenue by 100%
Monster spent enormously on promotions, marketing and sales. In 2004 Monster were spending 20% of gross sales on trade spend (promos and discounts) and a further 20% on selling and marketing.
They were very innovative in reaching customers including partnerships with Costco , selling direct to consumers and even being the lowest bidder for a food stamp program.
They understood their customer early and took advantage of that, for example limiting diet, sugar free and also limiting light/white/silver colors. They kept the can Black.
As they built their brand their sales margin contracted (lower trade spend) adding to this were retailers seeking to carry them because of their good reputation and good brand.
Monster shows us the value of high sales growth, building a brand and the potent mix of high sales growth, expanding margins and rising returns on equity.
Bezos used to work at DE Shaw as a trader, he supposedly understood two things very well 1) value of a business is the future free cash flows discounted back to present and 2) allocating capital is the important aspect of return on invested capital
In a 1997 letter he stated “market leadership can translate directly to higher revenue, higher profitability, greater capital velocity and correspondingly stronger returns on invested capital – our decisions reflect this process”
Looking at Amazon reported income In 2014 it had $88B of sales and earned a measly $170M of operating income (0.2% margin) adding back $9.2B of R&D however paints a different picture.
Return on capital is extremely important if a company can continue to reinvest at a high rate of return the stock will compound giving you a parabolic effect
Became a 100x by creating great content, securing key licenses to valuable franchises thereby keeping
competitors out. Profits through the history have been erratic and volatile.
EA focused on its bottom line, one of the early examples of EAs ability to protect margins was disintermediating the distributor and selling direct to the retailer.
EA founders chose the name because they wanted to promote their games as a kind of art
They treated their game developers like rockstars and handed out personal credit for the creation of the game. This was to create sensational PR.
They created a culture that produced winning games.
That is a common thread with all 100-baggers – explosive sales growth.
Ralph Roberts transformed a time Mississippi cable company into an industry giant. The roots of the story go back to the 1960’s. Back then Cable TV was a tiny business of community antennas and wires. Roberts started with his first acquisition Tupelo, Miss. Transmitting for 1200 local residents.
The revenue didn’t show the value of its subscriber network, they were very sticky, paid every month year after year and formed the backbone of the thesis.
You didn’t see earnings but you saw explosive sales growth and growth in subscribers, in 1980s comcast was very acquisitive.
They bought QVC a home-shopping TV network for $2.1B in ‘95, American Cellular network Corporation a regional mobile service for $230M in ’88. They then launched @HomeNetwork which offered internet services. These efforts earned a $1B investment from Microsoft in ’97.
Bill Gates quoted: ‘Comcasts integrated approach to cable distribution programming and telecommunications complements that ision of linking PCs and TVs’.
Again explosive sales growth and an unclear profitability trajectory were at play here.
Loft Inc. absorbed Pepsi and rebranded itself as such in 1941.
Pepsi filed for bankruptcy twice in 1923 and again in 1931, if you bought stock in 1938 you cost base would have been 75c. That stake was worth $427 in 1971.
In 1982 PepsiCo acquired Britain based Walkers Crisps and Smith Crisps.
There are two key facts financially. 1) Pepsi had consistently high margins of 57% or better and 2) sales and profit growth were incredible for example sales in 1962 were $192M in 2014 they were over $84B NPAT went from $15M to $6B and spun out YUM Brands.
Commands approximately 70% of razor blade market
Founded in 1901.
Gillette had a very entrepreneurial culture with a desire to continually expand into new markets and new products, they employed technology extensively for example Gillette was a very early adopter of TV advertising.
Interestingly its Return on Equity and profit margins declined over 20yrs from 1962-1982.
They were required to lower prices to compete on multiple occasions with new entrants, R&D costs and new product launches took lots of capital investment. When R&D investments started contributing the profit margins began to lift and so did sales growth.
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