📈How To Find The Next 100-Bagger (10 Lessons from the Book)
<5 min read 🧠
Hi there investor! 👋
Today we’re discussing one of the best books written on 100-baggers (Stocks that turn $1 into $100).
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10 Lessons from 100-Baggers by Chris Mayer📈
Let’s get into it 👇
1. Achieving 100-Bagger status takes time
The average time to 100-bagger is 26 years. The variance of reaching the 100-bagger mark is 16 - 45 years.
The key components of multi-baggers are:
Growth + PE expansion + time
Growth & Multiple expansion is considered the dual engine of compounding from the book.
2. Look for superior business models
Not all 100-baggers have high margins. Amazon uses all its excess cash on R&D. Which has led to spectacular returns for investors If you were too adamant about earnings, you would have missed it.
Great business models to study:
Constellation Software
Danaher Corporation
Costco Wholesale
Mastercard
LVMH
3. 100-baggers have high Returns on Capital
The two most important factors for a multi-bagger are the return on the capital it invests in the business (ROIC), and the ability to reinvest in the business to expand it at these high rates. A business that has both of these factors, becomes a compounding machine.
High ROIC businesses like Mastercard and Visa often have low reinvestment opportunities. These businesses are only able to reinvest 10-20% of their profits. The rest is used for buybacks & dividend payouts (OK but not ideal for compounding).
High return on invested capital will significantly outperform low ROIC businesses over time.
A high and consistent ROIC often tells us that the business has something special as it consistently can earn above-average returns without competition affecting the returns.
4. High Gross Margins is an indicator of a great business
Gross margin measures the value a business adds. 100-Baggers revealed that gross margins are surprisingly resilient. High gross margin businesses tended to keep their high margins. These businesses often have a sustainable advantage over competitors.
With a high gross margin, the business can be more stable and resilient to market fluctuations, higher interest rates, lower consumer spending, and so on.
Prime example of a high gross margin quality business:
5. 100-Baggers are all around us
There was no specific industry that produced more 100 baggers. The companies were found in different forms and industries. However, the recommendation is to stick with stable and resilient sectors.
An overview of high ROIC industries:
6. Share buybacks can create a 100-bagger
As long as buybacks are done when the business is below intrinsic value, share buybacks can be an intelligent way of using excess cash. NVR is an example of a capital-light business model that utilizes share buybacks to achieve 100-bagger status:
These stocks are often called cannibal stocks, indicating that they are buying up their shares outstanding rapidly. This strategy is more tax-efficient than paying a dividend because the shareholder is not taxed on the buybacks, but they will be taxed on the dividends.
Companies engaging in buybacks when their valuation is low (<20 times free cash flow for example), are creating substantial value for their shareholders.
7. Owner-operators vastly outperform
A study by J. Shulman showed that businesses that were founder-led outpaced the index by 7% annually. Skin in the game aligns with the management team and the shareholders. Examples: LVMH, Constellation, Berkshire.
Read our recent article: 👑5 Founder-Led Businesses
8. Buy right, sit tight
The Coffee Can approach promotes “Buy right, and sit tight”. The approach advocates buying the best companies and holding them through thick and thin. Mayer concentrates on 10-20 good ideas to sufficiently spread your risk.
Long-term multi-baggers held by Baron Capital:
9. Small is beautiful
Smaller companies have room to grow. It's no surprise that smaller stocks have the greatest upside potential. Large firms will run into the "law of large numbers" at some point. The median market cap of businesses in the 100-bagger study was $500 million.
This tells us that we’re most likely to find a 100-bagger in the Mirco/Small capitalization range.
Read our article: 3 Small Cap Stocks to Buy💎
10. Multiple Expansion and Growth are Essential
A 100-bagger in most cases will need sustained growth over decades, and multiple expansions.
Buying a business at 10 times earnings, which expands to 30 times earnings in 10 years represents an 11.6% increase to CAGR.
Now add a 15% EPS growth over those 10 years, and you have 11.6% + 15% = 26.6% CAGR in share price increase (Not accounting for dividends).
On the opposite side, if you buy a business at 30 times earnings, it goes to 10 times earnings over 10 years with the same 15% EPS growth.
Your result will be -10.4% + 15% = 4.6% CAGR over those 10 years — not a great result.
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Nice article! Finding 100-baggers isn't easy. But, the thing that is the hardest is probably holding them through the whole journey.
The focus on finding smaller, high-quality businesses with room to grow is particularly relevant for investors looking to identify multi baggers ;). Great post!