One of the most eye-opening books I have read recently is “ 100 Baggers” by Chris Mayer. As you may have deduced from the title, the book is about stocks that have returned 100 to 1 in the market i.e. for every £10,000 invested you end up with £1 million. The book is a great read and well worth your time. It is exhilarating and leads the reader into being thrilled at the returns available for investors in the stock market
What surprised me most was that the majority of the stocks in the study were not speculative in nature. There were not as many biotech, junior minors or oil exploration companies as I had imagined. Furthermore, the median market cap for each at the outset of Mayer’s study was $500m – hardly the size of speculative investments.
Another surprising aspect was just how many stocks produced 100x returns. In the book, Mayer produces a list of 365 stocks that have achieved this feat between 1962 and 2014.
When looking at the numbers, 365 stocks that returned 100x seems a lot. For perspective, there are around 3,600 listed stocks in the US today. Although I am not comparing like for like as numbers from one year to the next constantly change, it just shows you that you have a good chance of picking a hundred bagger.
In fact, many of the stocks on the list were household names. They include American Express, Boeing, Caterpillar, Coca Cola, Colgate Palmolive, Disney, Gillette, FedEx, JP Morgan Chase, Kellogg, PepsiCo, Johnson & Johnson, McDonald’s, Monster Beverages and Nike to name a few. With so many household names, how come more investors didn’t end up with 100x returns?
And here lies the first lesson. When one finds such a company, they should be prepared to hold it for a long period of time. Just look up my article on coffee can investing to find out why.
People tend to sell their winners too soon. They see a stock they own double and are quickly tempted to sell. They do not see the big picture and assess whether the company can keep doubling here on in. Besides, if you buy into a company which goes up 60% and you sell it, sure you have done well, but remember you then have to go find another one.
When you find an exceptional company, don’t let it go so easily. Instead, buy and do nothing. You need to be able to ride winners. The average time period for each of them to go up 100-fold was 26 years, which is an impressive 19% per annum.
Building on Mayer’s work, Nick Train recently did a study on FTSE350 stocks that have 100 bagged since 1980. He found there to be 12 companies out of he current 350 biggest UK companies to have a hundred bagged during this time. That is close to 3% of all companies – not bad!
You have had a better than 1/30 chance that a random company, now a constituent of a reputable benchmark, has made a patient investor a very great deal of money. Already those odds are interesting and confirm Mayer’s lesson that big winners abound.
The companies in the FTSE 350 that went up 100x are Ashtead, Antofagasta, Cairn Energy, Capita, Daejan Holdings, DCC, Domino’s Pizza, JD Sports, Next, Randgold Resources Sage and Tullow Oil.
Train went a step further and looked at those FTSE 350 companies that have gained between 50-100 times. They are BTG, CLS, Clarkson, Cranswick, Dechra Pharmaceuticals, Diploma, Grainger, Rotork, Paddy Power, St Modwen, Savills and Sirius Minerals from the FTSE 250.
The news gets better: as many as 65 companies increased between 20-50 times. And a further 82 have gone up at least 10-fold at some point since the mid-1980s. In total that means that 171 companies or nearly 50% of the current crop of 350 major quoted UK companies has at some point gone up by 8% per annum. Enough to turn every £10,000 into £100,000 over the time period.
Going back to Mayer’s work, there is much to be gleaned and learnt from his book. Whilst I will not divulge all the secrets, as it would be unfair to the author, I will point out the following attributes that would help in identifying a hundred bagger.
Start small: small companies are more able to grow earnings through modest growth in market share. Median starting sales for companies in his study was $170 million. You want to find acorns that turn into oak trees.
High returns on equity/ capital: Charlie Munger famously quoted “it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return.” You need to find companies that can consistently invest their money at high rates of return.
Don’t sell early: the average 100x time return took 26 years. A company compounding at 50% will take 11 years to generate 100x. A company compounding at a more realistic 10% will take 48 years.
Low multiples preferred: buying low multiples alongside earnings growth gears returns. A lot of times stocks will increase due to multiple expansion (it will be rated higher due to persistently good execution). Whilst lower multiples are preferred, one shouldn’t be afraid to pay a little more for quality
Owner-operated: owner-operators typically act in the best interests of creating value for shareholders over the long term. Have a look to see how many shares insiders within the company own.
Growth: almost all of the businesses in the 100-bagger study were substantially bigger businesses at the end than when they began. Look for value added growth. A company needs to be able to grow in order to capitalise on the high returns on invested capital figures.
Hundred Baggers Of The Future
One stock I personally think will join this list in the years to come is Fevertree. The stock has already more than 10 bagged from its IPO in 2014 going from £1.34 to £22 today. And I still think it has a long runway ahead of it.
Looking at Fevertree’s attributes, it ticks all the points mentioned above. It has strong returns on capital, still run by its founders, still has a low market cap and has a long runway for growth in front of it. The set-up is almost perfect baring one great concern, the valuation.
Fevertree currently has an eye-watering valuation as it is trading at close to 40x earnings. This at first glance seems to go against Mayer’s book as low valuations are preferred. But Mayer in his commentary is not rigid. He says one needs to balance valuation with the quality and growth of a business. There are times when even 50 times earnings is a bargain. You have to balance the price you pay against other factors.
Fevertree’s high valuation at present is a reason why the stock price has stagnated over the past year, in spite of the double-digit growth the company is recording. The stock seems to be taking a breather and waiting for earnings to catch up to the heady valuation. But don’t let this period of lull fool you. To have a hundred baggers, a stock doesn’t need to go up each and every year.
Just look at examples from Mayers book. Bank of NY Mellon went sideways from 1976 to 1981, amidst a 100x run. Texas Industries: sideways from 80 to 85 in its 100x run. AMEX: flat from 85 to 92 amidst its 100x run. Berkshire at its peak in 1998 was no higher seven years later.
I believe Fevertree is going through one of these stagnant or boring periods in its run to being a hundred bagger. I know a number of people who bought it at IPO that have sold in the past few months. Yes, they have locked in 10x gains, but they could well be giving up on another 90x. It seems boredom has kicked in as they no more see the price going up every day. Holding a stock that has gone nowhere can be excruciation. Particularly in the current bull market where all the other stocks are charging forward.
This is why I have bought Fevertree in this stagnant period. My purchase price for the shares I bought was a tad over £20 a share.
Sure the share price might float around this level for the next couple of months or years as earnings growth plays catch up and burns the excess valuation. But I am prepared to wait. I just don’t know when Fevertree will shoot higher again. I would kick myself if the price rockets higher and I didn’t buy-in. At my purchase price, the valuation seems fair for a company of Fevertree’s quality and growth runway. For now, I’ll be patient and hope that one day the company can be my hundred bagger.