The End of the Road for Multibaggers
In this bonus article, we are going to cover the potential pitfalls that a multibagger owner should be aware of to avoid losing all their handsome returns.
1. Market Saturation
Market saturation often causes businesses to come out of the Compound Growth stage and enter the Cash Cow phase. There is simply no more space to grow in the market. Once the potential demand is reached, returns can only increase marginally.
Dominos Pizza only has the licensing for UK and has slowed its expansion in recent years. Market saturation has lead to their share price more than half in the last five years.
2. Competition
We have already seen the 95% decline of ASOS, having one hundred bagged in the years before its decline. With little barriers to entry in the online retail market, competition flooded in and ASOS struggled to remain competitive.
Without a competitive advantage or an economic moat in the market, something we discuss in a previous article, competition can stifle your growth and limit your returns.
3. Competition Authorities
Some businesses create too much power that their competitive advantage can be pushed too far. We saw that one of our multibaggers of the last decade, CVS Group, fell under scrutiny from the UK’s Competition and Market’s Authority.
The CMA found that veterinary costs had risen faster than inflation, and they've now done an inquiry. That led to a thirty percent drop in that company's share price. This is also known as antitrust regulation in the USA. So success can breed these types of anti-competitive reviews. So that is something that does need to be considered.
4. Technological Disruption
Many business models have been hurt by technological disruption. Think of the impact iPhones have had on Polaroid or Eastman Kodak. Shifts in technological capabilities can cause some long-lasting businesses to be severely affected.
RWS, a translation business, has seen all of its margins being attacked by the rapid growth of artificial intelligence.
5. Bad Management
Poor capital allocation such as over-expansion, value-destroying acquisitions, excessive dividends or debt issues can have catastrophic consequences on a business.
Carillion was a great UK market winner, but poor management decisions by taking on too much debt and over expansion led to compulsory liquidation in early 2018.
These are just scratching the surface of some of the things that spell the end of the road for multi baggers. Many multibaggers can turn into Cash Cows for a very long time - and if you've bought well you can earn significant perpetual dividends. The very best though, like Apple, Microsoft and Monster Beverage, can continue to grow into global markets.
However, it is important to be aware of the potential pitfalls that lead to your multibagger falling into a value destroyer!