Christopher Mayer
100 Baggers: Stocks That Return 100-to-1 and How To Find Them
Today we will start a new series that I have kept private for years.
I continuously study the best individuals in order to find out what made and oftentimes still makes them the best in the investing world as well as in other fields like business, sports and life.
In short, this series will focus on my learning journey using diverse sources of learning material like books, interviews, talking to the individuals or even working with them and sharing their essential traits and wisdom for me and you to grow.
100 Baggers
In his book, Christopher focused on studying "100 baggers".
100 baggers refer to stocks that have provided a return of 100 times or more on the initial investment. In other words, if you invested $10,000 in a stock that became a 100 bagger, your investment would be worth $1,000,000.
The engine of a 100-Bagger is the combination of earnings growth and multiple expansion which usually happens through an earnings growth acceleration.
The “twin engines” of 100-baggers with the example of $MTY.
What makes a good investment?
‘If you asked me what makes a good investment, these days I will say the ideal would be a business that generates a lot of cash flow with significant growth potential, achieves a high return on invested capital and can consistently reinvest profits for further returns, maintains strong balance sheets, that has insider ownership with leadership in their 40s to 50s.
That would be the ideal’ - Christopher Mayer (interview here)
Facts
68 percent of multibaggers in the selected sample were trading below a $300 million market cap at their low.
The most powerful stock moves tended to be during extended
periods of growing earnings accompanied by an expansion of
the P/E ratio.
During 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.
Some 100-baggers, despite low single digit earnings growth managed to grow their stock through buybacks. The key is the final perceived value as a shareholder.
The best 100+-Baggers
The Ethos
Invest for the long-term:
The key to achieving 100-bagger returns is to invest in companies with long-term growth potential and to hold on to those positions for as long as possible.
Focus on competitive advantages
Mayer stresses the importance of identifying companies with sustainable competitive advantages, such as unique business models, innovative technologies, or strong brand recognition.
Be patient and disciplined
He emphasizes the need for patience and discipline when investing in 100 baggers, it takes an average of 26y to reach the status.
Manage risk
Mayer advises investors to manage risk by diversifying their portfolios and avoiding excessive speculation or leverage.
Invest in great capital allocators(ROE)
companies with consistently high ROEs are able to generate strong profits year after year, which allows them to reinvest in their business and compound their earnings over time. ROE is a sign of a company's competitive advantage, as it suggests that the company has a strong business model, efficient operations, and effective management
Expect skin in the game
Invest in people that care. Founder led businesses outperform drastically. Those that combine both the original leadership or long term management tenures as well as a high ownership outperform. In short, invest in business owners that care enough to bet their net worth on the company and want to lead for the long term, it is who they are (example Thomas Gayner at Markel, 33 years with +15,693%)
Price matters
Buying a company in the bottom or top of its valuation range could make a stock a 50 bagger or 100 bagger (ex: bought at 10PE or 20PE). Buying businesses when others panic or during downturns can drastically change forward returns. If possible, try to underpay for the same longer term growth. Great businesses at fair prices with a few instances when you can get great businesses for discounts, that is the goal. Remember that the multiple expansion is a core part of a 100-bagger.
Do your own research:
Mayer encourages investors to conduct their own research and to develop a deep understanding of the companies and industries in which they invest. The better you understand the business, their values, the way they work through adversity and hard times, the better you become at sitting and letting the business compound and the better you will understand potential decisions within the management that could go against the company values and thus your investment.
Compound Annual Growth Rate Needed Years to 100-bagger
10 years, the CAGR needed is approximately 59.18%.
15 years, the CAGR needed is approximately 41.42%.
20 years, the CAGR needed is approximately 31.18%.
25 years, the CAGR needed is approximately 24.97%.
30 years, the CAGR needed is approximately 20.32%.
35 years, the CAGR needed is approximately 16.97%.
What kills an idea?
Debt
High levels of debt can put a company under financial stress and may make it difficult for the business to invest in growth initiatives or weather economic downturns.
Deeply cyclical companies
(tanker, mining, heavy industrials): Industries with high cyclical volatility can be difficult to predict and may experience significant fluctuations in demand and pricing.
Biotech businesses:
Biotech companies can be risky due to the lengthy and costly process of drug development, which often result in failure.
Return on assets low single digits
Companies with low return on assets may indicate a lack of operational efficiency or poor asset utilization, which could negatively impact profitability and long-term growth prospects.
Businesses using debt to create return on equity
High levels of debt can artificially inflate return on equity, but can also increase financial risk and make the business vulnerable to economic shocks.
Businesses without competitive advantage:
Companies operating in highly competitive industries may struggle to differentiate themselves and may face pressure on pricing and profitability.
Accounting issues or fraud:
Values and the highest reputation needs to be at the heart of the business. The best businesses are run clean and efficiently. Staying away from the companies that have a history of poor values will ensure your safety.
Bad management
Poor leadership can negatively impact a company's strategic direction, return on capital and equity, operational efficiency, and financial performance. The Management needs to be extremely good at allocating capital.
The market will test you, thus owning the businesses that are proven and strong in each part will give you the confidence to step up and create alpha when most are panicking.
The current portfolio
Christopher Mayer runs his own fund called Woodlock House Family Capital.
I took time to find and research each companies that Christopher has in his current portfolio. A few things stood out which I would like to touch on.
The Valuation metrics do not matter as much as most would tell you to worry about. The focus was put on the company ability to generate a high return on equity. Nine out of Ten of these businesses have an ROI of 14% or more.
To give you an idea, the S&P500 had an average ROE of 13.7 for the last period I could find (material).
All businesses have positive gross and profit margin. All businesses have a gross margin over 10% and only 2 had a profit margin under 10%.
The S&P500 has an average CEO tenure of 10.2 years at the age of 63. 50% of the companies Christopher bought had tenures longer than the average, all the way up to 33y for Heico Corp.
Dominos was the only company that did not fit the overall portfolio character. It has low revenue and eps growth, a short CEO tenure and the only negative ROE. I would like to understand the Dominos investment better and hope to be able to adjust the blog once I do.
The explanation that makes the most sense is that the Domino trade is an economy of scale bet, which we saw from other investors like Nick sleep with AMZN or Charlie Munger with COST.
Final thoughts
The main point Christopher tries to make is the long-term focus that is needed to catch the 100-baggers. Simply changing the time horizon changes the investment philosophy and creates very logical central points.
The focus is put on what actually matters to maintain a long term runway, in essence we need businesses that will survive over decades to allow for the compounding to substantialize, which most of us know from Berkshire under the Buffett leadership.
Companies do not survive nearly as long as people believe.(page 22)
Moat or competitive advantage is the most essential aspect of the biggest winners. Most questions within the research process revolve around the stability to allow for that moat to work your position from 1 to 100x.
Stability of earnings, growth, around shocks and crisis, leadership and share basis.
Once you find these characteristics, it takes patience to capitalize, the average time to reach the 100-Bagger status was 26 years.
Overall, the ethos of "100 Baggers" is centered around a long-term, disciplined approach to investing, with a focus on identifying companies with sustainable competitive advantages. It reduces the investing approach to a simple idea that is easy to forget in this fast-pace world: Try and find the businesses that will be there in 30y and that have room to grow and return the created value to the shareholder.
Let us all know what other stocks fit the 100-bagger pattern as well as those that have the potential to become the next ones in the comments!
Hopefully you like this format as much as I do. Writing these blogs allows me to be thorough about my research and makes sure that I my understanding is high. If you enjoyed the reading all I ask for is for you to spread the knowledge and share the blog to help me grow this sub stack.
Very well written and an interesting topic. Thx
A more risky investment could be in crypto projects that have a good business idea and their tokens have real utility. I think there are some good ones which majority of people isn’t aware of yet.