I recently wrote an article as a follow-up to the popular multi-bagger studies, looking at the subsequent performance of the UK multi-baggers. To do this, I used two studies: "The makings of a multi-bagger" by hedge fund Alta Fox in 2020 and, more recently, Stockopedia's 2023 study, which looked at the best-performing UK Stocks over the previous decade.
The key attributes of stocks that generate exceptional performance found by these studies (and others) tend to be the same. I have previously summarised these into my "MROC" framework. Investors should be looking for companies that have moat, runway, operational leverage and are cheap.
Moat
These are companies with a sustainable competitive advantage. This means that competitors have been unable to deploy additional capital to eat into their returns over time. Instead, the company can reinvest capital at high rates to drive sales growth.
Runway
A moat is a great asset for a company, but if there isn't scope to deploy additional capital at very high returns, the business will always remain niche. For investors to receive phenomenal returns, a company requires a significant growth runway ahead.
Operational Leverage
A strong moat and significant sales growth alone can generate excellent profit growth, which may be reflected in the share price. However, the returns will be even higher if the bottom line grows faster than the top line. This is known as operational leverage.
Cheap
The best returns came from investing in companies where sales grew quickly, profits snowballed, and the multiple the market gave those earnings expanded. Multiple expansion is far more likely when investors pay a low multiple when purchasing a stock.
If these qualities are present in great companies and missing in the rest, then investing in great companies should keep generating strong returns. However, when I looked at the subsequent performance of the previous UK high-performance stocks, the results were a bit deflating. Far from being a secret of success, investing in all previously high-return stocks was a losing strategy and significantly underperformed wider market indices. In particular, the UK companies in the Alta Fox study had subsequently underperformed the UK Allshare index by around 50%.
I did manage to improve the future results of the multi-baggers from the Stockopedia study by excluding loss-making shares and those that had grown sales or share count very rapidly. However, it only improved the results to the market…
