Screening For 100 Baggers

18th Nov '22 by Mark Simpson

16 comments 5316 reads

In last week's article, I introduced some of the concepts behind quality investing, and in particular, a screen that attempted to find Buffett and Munger style of stocks – those which may be wonderful companies at fair prices. The idea is that such companies may have a sufficient sustainable competitive advantage and long enough runway that they generate very high long-term returns. The Buffett and Munger Screen I created generated 51 results.

One of the readers, BnB, pointed out that amongst these results are very few companies that may really be Buffett and Munger stocks. And I agree. Finding these kinds of stocks is difficult. Looking again at one of my favourite charts, Michael Mauboussin’s invested capital (ROIC) over time by quintile, it is clear why finding these kinds of stocks is so tricky.

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In the same study, Mauboussin looked at 1000 non-financial companies from 1997 to 2006 and found just 4% of these remained in the top quintile for ROIC over the full nine years. Amongst these will be companies which have a high ROIC but not the ability to re-invest capital at high rates. Or they may be people businesses which often operate with low capital requirements but the employees retain the competitive advantage, not the firm.

So out of the universe of investable stocks, perhaps fewer than 1% will be the type of quality compounders Buffett and Munger would invest in. My screen aimed to narrow the field to those companies that may have a strong moat and may not have already been priced to perfection by the market. This screen is, therefore, only the start of the work. To identify stocks with a sustainable competitive advantage, a significant amount of analysis of the business model is required.

An Alternative Approach

There is an alternative approach. Rather than looking to the future in order to attempt to find wonderful companies at fair prices, investors can look for companies that have generated very high returns in the past. If they find common features amongst these top performers then these may be a guide to finding future high-return stocks before they go on their incredible run.

This is the approach that Thomas Phelps took in his 1972 book called 100 to 1 in the Stock Market: A Distinguished Security Analyst Tells How to Make More of Your Investment…

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Rusty2

18th Nov '22

Some surprising selections in that screen considerably how far some have fallen in the last 18 months, I' m talking about Best Of The Best (LON:BOTB), Cake Box Holdings (LON:CBOX) and Luceco (LON:LUCE), these are down around 75%-80%. Not sure the coffee can works in the UK, I know there have been some negative comments about it.

So many growth uk stocks seem to go wrong after a few years, you can look at Boohoo (LON:BOO), ASOS (LON:ASC), Card Factory (LON:CARD), Burford Capital (LON:BUR), Fevertree Drinks (LON:FEVR) etc.

yiannos1

Most of these are candidates for short selling ; the likes of Moonpig and Cake Box.

Certainly none of these will be a multi bagger and this screen will never work in the UK , simply because the UK’s stock market can never match the one in the States.

BnB

19th Nov '22

The most interesting take from the article is the idea that a low net margin, when combined with a high gross margin, is a better indicator of multilbagger potential than the high net margins to which I am instinctively drawn. The maths of operating leverage makes sense but the strong moat that will become evident in the expanding net margin is not there in the numbers pre-lift-off.

Coming from an entrepreneurial background my take on big winners is to note that IP in various forms such software, data, drug discovery or product innovation, has underpinned all the successes of the new century. Effectively applying that IP in markets that offer sufficient growth has been a successful formula for today’s winners. I would look to add R&D as a proportion of revenues to my screen but mostly you have to visualise the scale of the demand - what Silicon Valley calls the TAM - the differentiated quality of the IP and the company’s ability to execute.

Aargh Aitch

There's no businesses in the screen that makes me slap my forehead and yelp "Of course! A future multibagger, how could I have missed it!" which is partly the point; identifying businesses with the potential before the market identifies it and starts pricing in that potential. However, I'm seeing a lot of oddities: companies that I'd expect to be already too big to deliver exceptional growth, fallen darlings and niche businesses as well as some really peculiar ones who's potential to grow appears to me very constrained. Case in point National Milk Records (OFEX:NMRP) which heads the list; a provider of lab services to the dairy industry. This feels almost like a niche within a niche and perhaps should be regarded as a utility: dairy farmers presumably can't operate without their services whilst the sliver-thin margins of the industry denies NMRP pricing power.

I'd be interested to read Mark's next installment, as I'm thinking this series needs to be read together, and am interested to see which business he chooses for an in-depth look.

Benson212

Great article. As it suggests though, finding the 100-bagger super stock is a very difficult thing to do.. Of course, they do exist and expanding beyond the UK stock market should increase your chances of success.

But maybe Ed Croft's approach of trying to synthesise the 100-bagger stock is possible on the UK market. It would be great if we could backtest to see how a portfolio of these stocks would have performed, and simply buy and sell as they enter/exit the screen.

Thanks Mark, I'm finding this really interesting although it's not a strategy that I'm really sold on, so I'm interested in what you I'll tell us in the next part.

Also intrigued by the comment on businesses experiencing multiple re-ratings. Presumably this is where they experience a lift because their growth has tipped them from say a FTSE 250 member into the FTSE100 league and so tracker funds have to rebalance by shopping for shares in the business in order to replicate the new composition of the FTSE 100, this giving the share an extra price lift. This event should be predictable, at least when the business is on the cusp of transition.

I am contemplating taking a punt on Christopher Mayer's book. I like reading investment times whilst I commute to my un-engaging job, day dreaming of the future date when I may be able to tell my colleagues "So long suckers, henceforth I shall spend my time at my kitchen table, nurturing my millions!"

Ridley1966

I read Meyer’s book in recent months. The 100-baggers appendix at rear provides a complete list of total return & number of years to 100( 1962-2014). Interested to read that Berkshire Hathaway ( 19 yrs) has averaged 40% leverage & access to debt at less than Fed cost by internalising its insurance business premiums. The list of achievers in <10yrs provided was not what I expected to read. Overall a fascinating journal & lesson in patience!

Metatron

20th Nov '22

Feel it is much easier to find multi baggers by trying to anticipate the next bubble rather than analysing a companys business model.Cryptos being a recent example.Plenty of libertarians were publicising Bitcoin's potential when it was under $300 8 years ago .One can always find niche commodity or tech bulls even when they are out of favour .

Michael C

I value Mark's work but I'm afraid I have to agree with those in this thread who question whether this week's screen will work in the UK.

This is because I just don't see businesses in this country growing sufficiently. I am very confident this applies to those whose market is restricted to the UK because we have entered a period of low or no growth. I don't think even 10% of UK investors realise what lies ahead. Having lived through the 1970s I recognise the reappearance of many features of the decline which impoverished everyone - encapsulated perhaps in Hunt's use of the that dreaded phrase "unearned income" last week.

And even if a business emerged in the UK which had the potential to be a 100 bagger I do not think it would stay here because the kind of people who can make such things happen won't stay. Why would they? I wouldn't. I'd scarper as fast as I could, like James Dyson, John Reece, and Jim Ratcliffe.

Having said that, it sounds as though Mark thinks one of the 38 in this week's screen might be a ten bagger. Have I got that right? If so I will try and predict it.

CamRaid

21st Nov '22

I was really keen on Creightons until they blew £6m on Emma Hardie

timarr

Not true, at least if viewed historically. Nick Train looked at this back in 2018:

https://www.lindselltrain.com/...

There are 12 companies in the current FTSE 100 and FTSE 250 which have at some stage delivered a 100-fold return to their investors – from a low to a peak. Let’s list them. From the FTSE 100: Ashtead, Antofagasta, DCC (up 525 times!), Next, Randgold Resources and Sage. From the FTSE 250: Cairn Energy, Capita, Daejan Holdings, Domino’s Pizza, JD Sports and Tullow Oil.

There were another 12 companies that had increased between 50% and 100%. And beyond that:

The news gets better: as many as 65 companies increased between 20-50 times. And a further 82 have gone up at least 10-fold at some point since the mid-1980s. In total that means that 171 companies or nearly 50% of the current crop of 350 major quoted UK companies has at some point almost certainly met most peoples’ hurdle for what constitutes a big investment winner.

It's also worth noting that this is a moving target - not many companies maintain excellence forever and we can be fairly certain that companies in cyclical industries that hit this kind of target will decline thereafter. Companies that can keep growing across the cycle, across different economic conditions and technological changes are quite rare.

The other challenge, of course, is to hold onto these stocks when they decline dramatically in the middle of their ascent - which they almost certainly will at some point. I gained some minor amusement at the SCVR "coffee can" picks last year, which were a motley collection of recent winners, most of which have fallen dramatically since. But who's to say they won't recover and prosper?

Generally, though, the idea of buying and holding stocks and acting as a long-term owner, rather than as a transient renter, of companies isn't in vogue. But it's definitely far more relaxing to own a collection of good businesses doing their thing and avoiding worrying about their prices than it is to be constantly monitoring the vagaries of market manic depression. And if that's your mindset the time to be buying is now, while there's a sale on, rather than last year, when it was a seller's market.

Mark Simpson

Hi BnB,

TAM is what I have called "runway", the ability for a business to scale. Not every business has this, but even those that don't can often expand into complementary areas. This can't be screened for, so it needs fundamental business analysis to identify.

In terms of IP, this provides a very powerful moat and R&D/sales may well be a good way to find companies where IP is their moat. However, IP is not the only moat. Indeed, Buffett & Munger rarely invest in companies where IP is the moat since it goes beyond their circle of competence.

So perhaps an alternative screen where R&D/sales replaces ROE consistency and Gross Margin as indicators of a moat may identify useful candidates for further research. However, adding this as an additional factor would remove many interesting candidates where IP is not their moat. Therefore I would see this as an additional screen rather than an enhancement of this one.

Overall, the challenge remains - which is that these screens are very much the start of a quality investor's journey, not the end.

Mark

Buffett & Munger rarely invest in companies where IP is the moat

Thanks for the reply Mark.

My point was not to dismiss other moats - big winner Amazon exploits its cost advantage and network effect, for example. But rather to try to characterise the types of companies that have the best opportunity to become huge in today's world, where resource exploitation (Exxon, Shell) has given way to exploitation of intellectual capital (Microsoft, Apple).

Nevertheless , if you consider brand as a form of IP (I do) then Coca Cola - Buffet's original big-bagger, has two moats based on IP, the other being the "secret recipe".

Olly Daney

brilliant article and I really recommend the book as well.

HHR

23rd Nov '22

Thank you Mark I think your article is a brilliant encapsulation of the multi-bagger long term hold investment strategy and a good synopsis of the book too.

What I like about your article is you focus on high growth profitable comapnies. People often erroneously assume that for a stock to 100 bag it has to be a micro-cap cancer cure or oil prospecter with zero revenue and a good story. Whilst good returns can occasionally be made on these gambling type stocks, very few of them make it to 100 bag - for that to happen sustained profit growth is usually needed.

As you and others have pointed out the screen is just a start point - one of the things I like about Mayer's approach is the skillful analysis is of markets, ceo's, moats rather than ratios. As such it lends itself more to entrpreneurial acumen rather than pure quant algorithms.

I want to make a couple of points about never selling. You point out the downsides but if an investor doesn't coffe can then how and when do they decide to sell?

I sold two multi baggers on a double (Sage and Rightmove). If I had held them along with all the hundreds of investments I have made over my career I would be massively ahead of where I am now (I would have had two 100% losses too).

You might counter 'but you wouldn't have made hundreds of investments if your capital was tied up in those two, maybe you wouldn't even have bought them if your capital was tied up in other stocks waiting for a 100 bagger that never came'. That is why my strategy now is to hold the multibaggers until they delist or I die or they go bust but to top slice capital off if I see a 'better' new idea come along. I don't coffee can all my investments, a share has to at least 3 bag before I would coffee-can it.

Specifically I want to address the points you make about never selling:

1) natural over-concentration of portfolio. This might matter to an EMH university lecturer but does it matter to us PI's? If you are rich then it doesn't really matter if your wealth is concentrated in a few stocks

2) every company fails sooner or later. I don't think that's right. Cisco and Rightmove and Amazon may go bust one day but it's unlikely to be in my lifetime and it should be possible to anticipate and reduce exposure if not sell out comletely

3) near certainty of eventual portfolio underperformance as the 100 bagger goes ex-growth and multiple deflates. Like point 1 I don't think this matters if the long term portfolio performance is still good. So whilst you might generate 20% portfolio CAGR while you are riding your first multibagger and that might drop off to 12% CAGR as it goes ex-growth then does that really matter? 12% is still a good long term return and you are sitting on massive profits from the multi-bagger

4) poor performance of Buffetology fund. I know Buffetology fund has a lot of fans and I respect their opinion but personally from the little I have seen I don't find it a good representation of what I understand to be the investing style of Buffet and Munger. I am thinking of Revolution Bars and Darktrace here, both of which I struggle to fit to a 'typical' Buffet stock

Thanks again for the great article

24th Nov '22

I'm posting some additional thoughts here rather than the latest post (Which focuses on one particular stock), as they are more relevant to 100 bagging in general.

Most of them are focused round the idea that it matters less whether or not the market records Stock X as a 100 bagger, but whether YOUR STAKE in it increases 100 fold. This means buying as cheaply as possible and keeping as much of the return as possible. That way Stock X might "Only" grow a mere 98 times, for example, whilst your value in it grows 100 times.

If you buy the same investment regularly, more specifically in a declining market, then you are buying those shares at a discount. This is a feature of Pound Cost Averaging that didn't really register with me until I read John Kay's explanation of it in "The long and the short and the tall of it". Likewise the brokers I am aware of charge significantly less for a regular transaction than a one off; last time I checked you could make a regular purchase with AJ Bell for 6 months before the accumulated broker costs equaled the cost of a one-off transaction.

It shouldn't need mentioning to British investors but use up as much of your ISA allowance as you can, that way you aren't shaving money off your profit for income tax, CGT or stamp duty.

A final return maximising idea that might be a bit extreme for many (But remember that Warren Buffett sold recovered golf balls well into his twenties and once drove across state, stopping at every Post Office to stock up on a rare stamp that was about to go out of circulation), if a share is attractive enough to you and employees can buy it at a discount; would you consider applying to work there part time?! Imagining for a moment that Stock X is Greggs (It isn't as Greggs only hits 4 out of 5 criteria for the 100 bagger screen), but a share with high ranks, that is round the corner from my house, that offers a staff discount, the potential to graze on their produce when the supervisor isn't looking(!), a uniform- and therefore the ability to claim uniform allowance- as well as a discounted share scheme for employees. A lot of the details are opaque: how much discount, how much can you buy and of course can you hold them in an ISA (Seems unlikely to me as their schemes are handled by Global Shares and YBS Shareplans respectively) and what are the charges? If I believed their stock had potential to grow 100 fold, I'd be seriously considering it though!

Finally, who else finds share price to be a mental block, when considering multibaggers? If a share already costs say more than £10, then I struggle to imagine it at £1,000, even though the maximum downside is 0 but the upside potential of any share is theoretically limitless. Stockopedia only lists 5 London shares who's last closing price exceeded £100. Yet I counted 332 going for 10p or less. Admittedly the vast majority of them are complete howler monkeys, judging by their bright red Stock Rank blobs but if any one of them hits £10 then it's a 100 bagger at the very least. Today 8 of the stocks on the 100 bagger screen are going for less than £1. Hmm'n!

Screening for 100 Baggers

An Alternative Approach

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Mark Simpson

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