The author Chris Mayer started Woodlock house family capital, and wrote his thoughts on how to find 100 baggers in a twist to the original 100 baggers, 100 to 1 in the stock market by Thomas Phelps. With his experience in corporate lending and banking, backing his investing knowledge, we don’t need to find exactly 100 baggers, but companies that have the chance to run multi-baggers over the long haul.

Introduction

-“Buy right and hold on” Thomas Phelps

-do not try to time markets

-instead of focusing on when the next best market is, focus on the next great company

-look for everything new: new companies, new methods, products that will benefit humanity. This requires forward looking, not backward looking

-forget day to day, focus on the long term

-In the stock market, the one who buys right must sit still in order to run fast

-investing is more art than science

Chapter 2

-real money is made in buy and hold; spend the rest of time bettering other parts of your life. Hold as long as the growth opportunity remains intact

Chapter 3

-coffee can portfolio. Certain amount of money in 10-year companies, don’t sell. Not all in, but allocations across several companies. And, start-ups are far riskier, don’t take too much risk in those. Somewhat more established, but can’t be too big.

Chapter 4

-4 criteria:

-most powerful stock moves tend to be during periods of growing earnings, with an increasing P/E ratio. I.e in bull markets

-P/E expansion usually also has increasing earnings, but Price increases faster

-the most attractive opportunities are in temporarily beaten down stocks with high growth. Perhaps even returning from losses to profitability

-continue holding even if it gets overvalued

-monsters beverage earnings went up 25x, but the stock price went up 125x

-buy at a lower P/E with high gross margins (50-80), with a long run way to go (just starting). MTY earnings up 12.5x, while stock price up 100x. So stock went from P/E 3.5 to 26. $0.34 per share to $34. Revenues 11.5m to 101m. Monster beverage also started at only 4 cents for 100x to $40. They were microcaps, under $300 million value

-40% of companies in the market are micro caps

-need growth in all dimensions: sales, margins, and valuations. -the average 100 bagger takes 25 years (21 percent annually). So, it takes 20-30 years for most of the 100 baggers. Some are shorter or take longer, but assume 20-30 years, with 20-25% growth rate annually.

SQGLP

-Size is small

-Quality is high for business and management

-Growth in earnings, revenue is high

-Longevity in quality and growth

-Price is favourable for good returns

*Quality management is the most important factor by far for any company actually

-invest with the top owner-operators and entrepreneurs

-critical to have low entry price if possible; 68% were micro caps (under 300 million market cap)

-an entrepreneurial founder and or a large shareholder can and often makes a difference

-no magic formula ultimately, make my own

-often offer ample opportunity to buy; ones with huge runways at a decent price

Chapter 5

-avoid utility companies and any large caps as such

-100 baggers can come from any industry incidentally

Of the 365 100 baggers from 1962-2014:

-median market cap: $500 million

-median annual sales: $170 million

-P/S of 3

-focus on national and international markets

-Monster Energy: focus on good branding for products

-these good companies have an explosion of value all across the board

-value investors club one author said to bet against monster energy, who won the competition three times

-need strong returns on invested capital

-Amazon spends a lot on research and development, which reduces operating income. But since R and D is a form of investment, that could be added back to operating income.

-need a very long run way to grow; that helps increase the CAGR you can use for the company

-EA sports; secure key game licenses, or for advertising, secure key celebrities. E.g. Nike securing Michael Jordan. They dealt directly with retailer and take out wholesaler middle man.

-also, explosive sales. To get a 100 bagger you have to believe the story and think big

-earnings growth is not necessary in the early going. What you need is reduced customer acquisition cost, increased sustained sales from word of mouth

-need sales growth and the ability to see beyond the reported earnings. If it’s obvious on the financials, then the company is no longer undervalued

-need expanding international markets, high gross margins. A lot of these 100 baggers are in simple businesses

-constant desire to grow a business is a key management characteristic. Companies that keep innovating, even if they are on top, are the ones that will be successful

-don’t be an economic forecaster

-a 20% grower at 20 P/E is better than a 10% grower at 10 P/E

Chapter 6 – the key to 100 baggers

-buy right and hold on

-stock search: find by highest ROIC

-20% or better for ROE consistently. A smart management team hits singles and doubles, not home runs that can risk the entire company

Chapter 7 – skin in the game

-management need 10-20% or more of the outstanding shares

-ETFs need liquidity so they buy large caps with lots of float (so management controls a small amount). But these companies do worse Over time. So, pick companies that have management owning most of the shares (a small restricted float), as they are more likely to be undervalued

-owner-operators outperform by 7% vs index on average

-the owner is more important than historical earnings or the P/E ratio

-invest alongside iconic entrepreneurs (usually 35-55 in age. 40s is the best time in terms of balance of experience and age)

Chapter 8 – the outsiders, the best CEOs

-capital allocation is the CEOs most important job

-value per share is what counts, not size or growth

-cashflow, not earnings, determine value

-need decentralized organizations

-independent thinking

-the best opportunity can be existing stocks

-patience and boldness are needed for acquisitions

-use leverage or financing to build more properties (more stores in other places), pay down debt, improve operations (shift to online order, delivery). 100 baggers do not give out dividends. That implies the shareholder knows more about capital allocation than management

Chapter 9 – secrets of an 18,000 bagger

-Berkshire borrowed on average 37.5% of total capital due to the insurance float of premiums.

-buy the next holding company that’s not a fund so they have permanent capital to work with.

Chapter 10 – Kelly’s heroes: bet big

-Kelly’s formula

-bet big and rarely; keep list of names relatively short. Focus on the best ideas and have concentrated positions

Chapter 11 – buybacks accelerate returns

this works only if the actual number of shares outstanding decrease. Since 1997, the 500 largest US companies have bought back 25% of shares, yet the actual # of shares grew, via stock options and share issuance.

-A company that buys back shares when its undervalued is good management

Chapter 12 – have a moat

-stable industries are better able to have moats

-changing industries less likely to have moat

-companies lose moats over time

-high ROIC is the most important metric. Pretax profit over average capital

-high gross margins are the most important metric thus. Closer to 60-90% is good. Low gross margins are not a good sign. If a company starts off with high gross margins, it tends to keep it. If it starts with low gross margins, it tends to keep it. Gross margins are hard to change, barring a significant change in the business. Operating margin can be improved over tome, by reducing SG and A, selling general and admin (overhead expenses not related to COGS). Winning companies tend to stay winning companies, losing companies tend to stay losing companies. Look at the track record.

chapter 13; miscellaneous mention on 100-baggers

-don’t chase returns by buying and selling. The best investors lag the market 30-40% of the time

-avoid boredom; boredom can kill and it leads to many problems, including investors sabotaging their own portfolios

-markets pay an excessive amount for companies with exciting stories

-when you view companies on a longer-term basis, it becomes easier to see if it is discounted or overvalued

-Carson Block; the more accolades a CEO makes and charming, the more likely they are to be arrogant and make mistakes

-read conference calls transcripts rather than listen to them

-don’t look to research put out by investment banks or brokerages for what to invest. So, do your own research DYOR.

-do not invest in any idea you can’t illustrate with a crayon; Peter Lynch

-the best investment ideas are often the simplest

-the best investment ideas actually come from people

-when we invest abroad, we often trade known risks for unknown risks

-Asset heavy businesses generally earn low rates of return as the assets have a high maintenance cost

-monetary depreciation favours the asset light companies

-the big picture crowd tend to get involved in the worst stocks

Chapter 14 – in case of the next depression?

-hunting for 100 baggers is completely independent of what’s happening in the market

-not all stocks come back. E.g. massively overpriced stocks, worse fundamentals, or too much share dilution

-John Maynard Keynes made 12% a year while stock market was down 15% per

-Like the great investors, stop worrying about the market in general. Look at individual companies. Keynes thought better to buy 20% off then wait for 50% and have it never occur to begin with. Keynes was constantly 90% invested, occasionally sold minor portions of portfolio of overvalued

-buy where actual and probable intrinsic value is higher than stock price

-balanced investment position, so one is not 100% exposed or overly exposed to one sector

-don’t be afraid to hold onto cash until you find 100 baggers

-cash is king in a recession

Chapter 15 – essential principles

-a company that can reinvest well over time, via ROIC.

-not important: the fed, the overall market, the dollar

-spend time understanding the company over economic forecasters

-traditional low valuation companies typically aren’t 100 baggers, the value traps

-lower multiples are preferred, especially if can get the PEG ratio under 1

-forgot about what indexes are doing, focus on the micro

-do not freely sell. Only if a mistake is likely made

Disclaimer

This is not Financial Advice. This article is meant only for educational and perhaps entertainment purposes.