100 baggers summary
- A business requires an extended bout of high growth to become a 100-bagger. Preferably, a business can maintain growth in every area from revenue, margins and Earnings Per Share (EPS). Businesses need sound growth drivers to expand internationally and domestically. But, they do not require a very large market and at times can control a specific niche. On average, businesses in the survey carried out by Mayer had taken 26 years to achieve 100-bagger status. Around 300 businesses did so between 16 and 45 years.
- P/E ratio expansion is the key to a 100-bagger in conjunction with increasing EPS growth. However what should you do when a stock’s P/E ratio becomes terribly high? In Mayer’s book, he quotes conflicting ideas on what to do when stocks arrive at a hefty P/E ratio and decides that investors should be ‘reluctant sellers’. The decisions comes down to whether your investment premise in a business’s fundamentals is still present and if you are able to sleep soundly when a stock becomes overvalued.
- Small businesses can grow by 10 to 20 times and still have potential for further growth. Consequently, it’s more straightforward for small businesses to become 100-baggers in comparison to larger ones. Mayer voices that the median revenue for the 365 businesses at the beginning of the study was around $170m and their median market cap was around $500m.
- At times, we need to look past earnings. For example, Amazon has invested a substantial sum on research and development (R&D), this reduced Amazon’s reported earnings over many years. In 2017, it spent $22.6B on R&D – the highest in the U.S – and proceeds to spend a great deal on R&D. Amazon had the choice to cash out from its earnings, but decided to reinvest for the future. For this reason, Amazon has transformed into one of the largest businesses in the world, earning its shareholders multi-fold returns following its listing.
- Buy right and hold on. Mayer brings up that ‘one who buys right must stand still in order to run fast’. He shows the idea employing the coffee-can portfolio – simply investing in the best stocks and holding them for 10 years. The coffee-can strategy protects an investor from market noise, emotions and volatility that might make them trade at inopportune moments. Mayer also raises betting big on the greatest ideas and refraining from a portfolio with too many stocks. Ideally, 10-20 stocks would be adequate to diversify your risk.
- A business requires a constantly high return on equity to compound its capital in order to turn into a 100-bagger. If a business distributes a dividend, it retains less capital to employ for future growth. As a result of this, high-growth businesses have a tendency to not pay a dividend and instead reinvest their earnings for growth.
- Owner-operator businesses have a tendency to vastly outperform the general stock market over a extended time frame. A 2012 study carried out by Erik Noyes and Joel Shulman revealed that businesses directed by the world’s billionaires grew faster than the index by 7% annually. When owner-operators hold significant ownership in a company, they will most probably be in tandem with shareholders’ interests. Substantial insider ownership is also seen as a fraud defence.
- Gross profit margin is an indicator of the price customers are willing to pay for a product/service over its cost and serves as a measure of value added to the customer. Mayer echoes a study conducted by former Lane Five Capital fund manager Matthew Berry: ‘If you can’t see how or where a company adds value for customers in its business model, then you can be pretty sure it won’t be a 100-bagger.’ The study found that gross profit margins were surprisingly resilient — businesses with high gross profit margins tended to maintain high margins, and businesses that had low gross profit margins stayed low. These findings demonstrate that businesses that have high gross profit margins possess a resilient, long-term edge over their competitors, and are more likely to become 100-baggers.
- The 100-bagger population appear to approve no specific industry and includes retailers, beverage markets, food processors, and technology firms. Having said that, Mayer recommends sticking with well established companies in sound industries with long channels of growth as 100-baggers require time to grow. However, the average business’s lifespan on the S&P index is shrinking. The key is to search for businesses with economic strengths that enables them to outperform other businesses and master their industries.
- Share buybacks accelerate returns — when carried out correctly. Following share buybacks, the amount of outstanding shares will drop and induce EPS and the share price to increase. Warren Buffet also sides with share buybacks when they’re trading below their intrinsic value.
100 Baggers Summary Conclusion
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