100 Baggers: Stocks that Return 100-to-1 and How to Find Them

by Christopher W. Mayer

Phelps advises looking for new methods, new materials and new products—things that improve life, that solve problems and allow us to do things better, faster and cheaper.

Relying only on published growth trends, profit margins and price-earnings ratios is not as important as understanding how a company could create value in the years ahead.

Don’t sell just because the price moved up or down, or because you need to realize a capital gain to offset a loss. You should sell rarely, and only when it is clear you made an error. One can argue every sale is a confession of error, and the shorter the time you’ve held the stock, the greater the error in buying it—according to Phelps.

Inflation. Wars. Interest-rate worries. Economic fears. The list of reasons to sell is always long. But if you’ve done the job of picking right, you’re better off holding on.

The idea is simple: you find the best stocks you can and let them sit for 10 years.

Good ideas usually have simple beginnings: it’s the very simplicity of the concept that makes them ultimately successful. This one was brilliant.

biggest hurdle to making 100 times your money in a stock—or even just tripling it—may be the ability to stomach the ups and downs and hold on.

what to do with the other 25 percent? Biggs recommended a much smaller part of your wealth go toward a ranch or family farm. He advocated a safe haven, well stocked with seed, fertilizer, canned food, wine, medicines, clothes and so on.

He drew four conclusions, which I excerpt below: • The most powerful stock moves tended to be during extended periods of growing earnings accompanied by an expansion of the P/E ratio. • These periods of P/E expansion often seem to coincide with periods of accelerating earnings growth. • Some of the most attractive opportunities occur in beaten-down, forgotten stocks, which perhaps after years of losses are returning to profitability. • During such periods of rapid share price appreciation, stock prices can reach lofty P/E ratios. This shouldn’t necessarily deter one from continuing to hold the stock.

Hansen Natural (now Monster Beverage) is a classic illustration of these points. Tony showed how earnings growth rates went from negative in 2001 to 0 percent in 2002. From there, earnings increased on a quarterly basis by 20 percent, 40 percent and then 100 percent. In 2004, quarterly earnings growth accelerated to 120 percent, and then 150 percent, 170 percent and finally 220 percent by the fourth quarter.

Meanwhile, the price–earnings ratio also ramped up. In 2001, earnings were just 4 cents per share and the stock had a P/E of 10. By 2006, earnings were about $1 per share and the P/E w...

Growth, growth and more growth are what power these big movers.

So, again, you need huge growth in earnings. But the combination of rising earnings and a higher multiple on those earnings is really what drives explosive returns over the long-term.

I call these two factors—growth in earnings and a higher multiple on those earnings—the “twin engines” of 100-baggers. We will come to this point again.

it’s easy to agree with Oswal when he wrote the single most important factor “is GROWTH in all its dimensions—sales, margin and valuation.” Most 100-baggers had huge

“Our analysis of the 100x stocks suggests that their essence lies in the alchemy of five elements forming the acronym SQGLP,” they wrote: • S—Size is small. • Q—Quality is high for both business and management. • G—Growth in earnings is high. • L—Longevity in both Q and G • P—Price is favorable for good returns.

that summarizes the idea: To make money in stocks you must have “the vision to see them, the courage to buy them and the patience to hold them.” According to Phelps, “patience is the rarest of the three.”

Small is beautiful: 68 percent of multibaggers in the selected sample were trading below a $300 million market cap at their low. (They were microcaps.)

you can’t just willy-nilly buy pricey growth stocks and expect to come up with 100-baggers.

Another trap is that earnings alone has many limitations. Heiserman shows the following: 1. Earnings omits investment in fixed capital, so when capital expenditures are greater than depreciation, the net cash drain is excluded.

Earnings omits investment in working capital, so when receivables and inventory grow faster than payables and accrued expenses, the net cash drain is excluded.

Intangible growth-producing initiatives such as R&D, promo/ advertising and employee education are expenses (i.e., not investments), even though the benefits will last for several accounting periods.

The point here is you can’t focus on earnings alone.

He says earnings just seem to step higher and higher, like going up a staircase. All of these studies show us that past multibaggers enjoyed strong growth for a long time.

If you buy a stock that returns about 20 percent annually for 25 years, you’ll get your 100-bagger. But if you sell in year 20, you’ll get “only” about 40 to 1—before taxes.

This means you can’t buy a utility stock or large mature company—such as McDonald’s or Walmart or IBM—and expect anything close to a 100-bagger anytime soon

With that warning, I’ll add that the median sales figure for the 365 names at the start was about $170 million and the median market cap was about $500 million.

That’s interesting on two levels: One, it dispels a myth that to get a 100-bagger you have to start with tiny companies. True, these are small companies. But $170 million in sales is a substantial business in any era.

Secondly, these figures imply a median price-to-sales ratio of nearly three, which isn’t classically cheap by any measure. Going through these 100-baggers, you’ll find stocks that looked cheap, but more often you find stocks that did not seem cheap based on past results alone.

you do want to focus on companies that have national or international markets.

“They spent heavily on promotions, marketing campaigns, and sales & marketing employees,” Yoda writes.

“They also found that using words like ‘sugar free,’ or ‘diet’ were perceived to be feminine, along with light/white/silver colored cans; according to their data.

changed the M to blue, and name it Lo-Carb.

They figured out that the only way to get shelf space for a second product is to make sure your first product is in very high demand.

“If you have a brand that catches on, grows, and hits scale, the costs start to slowly unwind.”

For all the detailed financial analysis in this case study, the essence of the deal is right here in this table. You see a rapid increase in sales, rising profits and a rising ROE. (We’ll get to ROE in chapter 6.) If there is a detectable formula for 100-baggerdom, this is it.

“So why didn’t everyone get rich? Very few people followed the story early on.” And even if you knew the story, you had to hold on—even if you looked silly and even if sophisticated people told you it wouldn’t work.

“The biggest point to convey,” Thompson wraps up, “is that return on capital is extremely important. If a company can continue to reinvest at high rates of return, the stock (and earnings) compound... getting you that parabolic effect.”

Sticky customers who pay every month, year after year, formed the backbone of any Comcast investment thesis.

highlight again the power of sales growth and the ability to see something beyond the reported earnings. Netting a 100-bagger takes vision and tenacity and, often, a conviction in an idea that may not yet be obvious in the financials.

Financially, I’m drawn to two facts. The first is Pepsi’s consistently high gross profit margins of 57 percent or better. As we’ll see later, in chapter 12, this is a clue to the competitive position of Pepsi. And second, the sales and profit growth was remarkable over time—as we’ve come to expect.

prefer to pay a healthy price for a fast-growing, high-return business (such as Monster) than a cheap price for a mediocre business.

Peter Lynch ran through an example in his book One Up on Wall Street: All else being equal, a 20 percent grower selling at 20 times earnings (a p/e of 20) is a much better buy than a 10 percent grower selling at 10 times earnings (a p/e of 10).

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

Say you invested $100 to start your own shoeshine business. You earn $25 in your first year. Your ROE would be 25 percent.

not the only factor because high-ROE companies can still be lousy investments. Price matters, for example. (Microsoft has always had a great ROE but was a lousy stock for a decade after 2000.)

when he talks to management, this is the main thing he wants to talk about: How are you investing the cash the business generates? Forget about your growth profile. Let’s talk about your last five acquisitions!

“If you have a company with tons of cash flow but top-line [sales] growth is 5% or less, the stock doesn’t go anywhere,” he said. “IBM is a good example. Good ROE. Cheap. But the absence of top-line growth means the decline in share count has been offset by multiple contraction.” As a result, the stock goes nowhere.

Jason is reluctant to buy a high-ROE company where the top line isn’t at least 10 percent. But when he finds a good one, he bets big.

“I said to people if you can’t pick winners, you should be in exchange-traded funds (ETFs).