100 baggers | Cristopher Mayer


Published: 2018

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A stock that for every $1 invested gives $100 back is called a “100-bagger”. For this book, Christopher Mayer and his publishers have invested $50k in creating a database of circa 400 such companies on the US market during the period 1962–2014 (dividends reinvested). Companies with market capitalizations of less than $50m in today’s dollars is excluded.

SMALL COMPANIES. For the group of 100-baggers, the median revenue was $170m at the starting point and the median market capitalization was $500m. The statistics also shows that 68% of the sample had a market capitalization below $300m.

YEARS TO 100X. The data shows that 16% of the sample developed 100x in less than 15 years, 49% between 16-30 years, 31% between 31-45 years and 4% between 46-60 years. Examples of 100-baggers are Franklin Resources (4.2 years), Valeant Pharmaceuticals (6.5 years), Dell (7.2 years), Monster Beverage (9.5 years) and EA Electronics (14 years).

SHORTER CYCLES. In the 1960s, the average life expectancy of a company on the S&P 500 was 60+ years. In the last ten years, that figure has dropped to 15 to 20 years. Mauboussin has studied 68 global industries (over 5,500 companies) and concluded that some industries are better at creating value than others. For example, the beverage industry is stable and changing slowly – soft drink trends are not greatly affected by the internet. The lifetime of the assets differs between industries: IT 7 years, Healthcare 11 years, Consumer goods 12 years, Groceries 15 years, Industrials 15 years, Telecom services 16 years, Energy 18 years, Materials 19 years and Utilities 29 years.

MULTIPLE EXPANSION. The largest stock increases have come from long periods of profit growth or from forgotten / “beaten-down” shares, which, after a year of losses, turn into profits. Buffett wrote in his shareholder letter in 1981: “While investors and managers must place their feet in the future, their memory and nervous system often remain plugged into the past”. Temporary problems can result in price bargains.

GROWTH IS KEY. All other things being equal, a 20% compounder at P/E 20 is a better buy in the long run than a 10% compounder for P/E 10. In 1962, Pepsi had revenues of $192m, which in 2014 had increased to $64bn. Net profit had increased from $15m to over $6bn. The share price increased 1,000x through a multiple expansion.

THE TWIN ENGINE. Monster Energy’s (ME) profits increased 25x, but as a result of higher earnings multiples, the stock price increased 125x. It is the combination of profit growth and multiple expansion that creates a really high return. When ME introduced its sports drink in 2002, growth had been negative for two years. In 2001, earnings per share were 4 cents and the share was valued at P/E 10. In 2006, earnings per share were $1 and the P/E was 50.

“Extraordinary performance comes only from correct non-consensus forecast. Extreme predictions are rarely right, but they’re the ones that make you the big money”

MANAGEMENT IS THE ALCHEMIST. Thorndike writes in the book Outsiders that the top executives know that: (1) capital allocation is the CEO’s most important job, (2) cash flow, not profits, determines value, (3) decentralized organizations promote entrepreneurship, (4) independent thinking is necessary for long-term success, (5) sometimes it is best to own your own stock and (6) patience is important in acquisitions, just like courage. Many of the 100 baggers repurchased their own shares when the valuation was low, which leveraged profit growth.

ROIC DRIVES “COMPOUNDERS”. Over time, it is difficult for a stock to yield much higher returns than the underlying value growth. Buffett has said that a truly fantastic company must have a permanent “moat” that protects the excess return on invested capital. This moat can be created by strong brands, replacement costs, network effects, cost advantages and economies of scale.

“If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re going to make much different than a 6% return – even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result” – Charlie Munger

KELLY ON POSITION SIZING. John Kelly Jr invented the risk taker’s theory of relativity, (BP-Q) / BS, with the purpose of creating maximum returns. B is the odds minus 1, P is the probability of winning and Q is the probability of failure (1-p). If the odds are 2.0 for a coin single to show head, and the coin is skewed and has a 52% chance of landing on head, the formula looks like this: P = 0.52, Q = 0.48 and B = 2-1 = 1. This gives (0.52×1 – 0.48) / 1 = 0.04. Kelly’s formula recommends investing 4% of the ‘portfolio’. A “Half-Kelly” means that you bet half of that to reduce the variance.

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