100 Baggers by Chris Mayer

Re-reading revealed many new insights

I re-read 100 Baggers by Chris Mayer yesterday. Interestingly I took more notes than when I read it the first time. While nothing beats doing the actual work and reading 10Ks, transcripts etc, re-reading some of these books seems to be a good idea for letting my mind get a new impression of things. 

What follows are the most interesting concepts I came across. My original notes are listed at the end of the post. 

Psychological Factors in Advertising

One of the key factors in Monster Beverages success was the packaging. They invested a decent amount of money into studying the colors and type of packaging that males associate with and re-designed their brand to match it, knowing their TAM was mainly male.  The thing that caught my attention is the effect of psychology on consumers and how powerful proper advertising and branding can be, especially in consumer products. 

R&D / Marketing & Sales Expenses viewed as investments

A big theme in the book is that 100 Baggers need sales growth and Earnings multiples growth combined to become explosive. While sales growth is easy to measure, earnings are a different beast. Earnings have obvious limitations and are often not as good a measure as Free Cash Flow. But what was interesting in reading this part of the book, was the fact that Owner Operators on aggregate tend to invest notably more into R&D then regular type CEOs. The reason for that is because they are more inclined to risk capital for future growth. In other words, R&D while listed as an expense is also an investment into growth. 

Chris points out that some parts of R&D could be more related to CapEx in nature, but some of it is an investment into future competitiveness. Since that is the case, R&D can be seen as a voluntary expense and alongside depreciation and amortization, it can be added back into earnings to see the current true profitability of a business. Now, as with anything in investing there is no precise formula, but one can create a range of possibilities of how much R&D is an investment and how much is CapEx. 

I will begin trying this out by using 20/50/80 to come up with a range of possible Owner Earnings + R&D values as well as the corresponding ROE and ROIC. 

Sticky Customers are the backbone

It seems obvious, but measuring stickiness is a great indicator of a moat. If customers keep returning for more and the share of repeat customers consistently increases, we have a good proxy for a durable business. 

High Profit Margins + High ROE & ROIC

The best indicator of the longevity of the moat of a company are high profit margins combined with consistently high ROE and ROIC. Charlie Munger said that your return on any investment regardless of if you bought it cheaply or for a fair price will end up averaging the ROIC of the business over the long run.. 

To measure if the P/E of a company prices it as fair one can use the earnings growth rate over the P/E Multiple. If the value is one, the company is fairly priced and if it is less than one, we’re getting cheaper. For example if Earnings grow at 20% a P/E of 20 is a fair price. 

Growth vs Dilution

Another point that may seem obvious is for a 100 Bagger sales growth and ROIC growth need to meaningfully outpace share growth. 

These were the highlights from my re-read. The concept of R&D as an investment resonated with me. A similar argument can be made with Sales & Marketing expenses, depending on the type of company. 

Here are the raw notes from my internal investment journal

100 Bagger Notes

http://csinvesting.org/wp-content/uploads/2017/05/100Baggers.pdf

Selling should always bring with it thoughts about three risks:

1. Am I wrong about what I am buying

2. Am i wrong about what I am selling

3. I have to pay taxes

That’s why you should only ever sell if the next company you’re buying is without doubt much better. Don’t sell for a small upgrade.

IDEA CREATION

Fintwit

Twitter Community

https://www.woodlockhousefamilycapital.com/post/q-a-finding-100-baggers

2023-07 READING

P32

Study of 19 100 Baggers:

• 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.

P33

Magic flywheel: immediately profitable, reinvest profits to create more revenue, rinse and repeat for 10 to 20 years

P34

68% of multi-baggers (10x to 100x) are micro-caps (p.38) and 40% of 100 Baggers

P37

Elements of a 100 Bagger:

• 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.

P40

Earnings growth excludes several things which are important. Expenses as reinvestments, ROE and ROIC as well as FCF need to be considered.

P45

1. Industry can vary widely

2. Median revenue for 100 Bagger is $170 million

3. Median market cap was $500 million

P46

Niche markets can lead to 100 Bagger but giant TAMs are far more likely to.

P47

Average time to reach 100x returns was 27 years

P49

Packaging is as a big part of monsters success. This points to advertising an effective brand is a huge part of success. Similar to cola cola. This seems to be especially true in consumer brands.

P51

Psychology of the consumer was researched heavily and used.

P52

100 Bagger formula:

1. rapid increase in sales

2. Rising profits

3. Rising ROE

P56 - 57

Adding back R&D by viewing it as an investment rather than an expense shows the true profit potential of the company as it is now. The same could apply for marketing.

It’s arguably smart to expense R&D like capital Expenditures as depreciation / amortization because some part of R&D is capEx but another part of it is fueling growth. How much is difficult to say but it’s a good framework for thinking about a business. Some R&D spending is voluntary.

This leads to conclude that another really important thing is Return On Invested Capital (ROIC). The trick is to know how much a % of the expenses (Marketing & R&D) are investments into growth. Like with anything else in investing there’s a range of possibilities, but the framework of thought is the key.

P63

Explosive sales growth is part of the 100 Bagger status. Interesting to observe in EAs case is the fluctuating profits and margins.

P64

Sticky customers formed the backbone of a company that reported losses because it kept investing into the cable network

@@ See through the reported earning@@

P68

A consistent desire to grow is important. Look for those signs.

P72

Don’t let a high P/E scare you out of buying a great growing company because the E is likely low due to the investment portion of the expenses.

P79

Consistent high ROE earned from high profit margins but not from leverage is a great screen.

P80

High ROE doesn’t mean much without strong revenue growth. That’s the key, it must grow a lot.

https://www.investopedia.com/ask/answers/09/return-on-equity-vs-return-on-capital.asp

P81

A lot of small victories are better than home runs. Most owner operators do a lot of small things consistently well.

P82

If insider ownership is not at absolute least 10% don’t even look at the stock. The probability of finding a big winner is too small to waste your time.

P85

Owner operators tend to invest more into R&D than other companies trying to build wealth

P86

The Virtus Wealth Masters Fund (VWMCX) a great filter for owner operator stocks

P127

High gross margins are the most likely indicator for longevity of a moat. And high ROIC

P128

If you can’t easily explain how a company adds value to the customer skip it.

P137

Look for long term incentive structures

P138

Read conference calls and don’t listen to them. Look for difficult pointed questions.

P139

Messy and complicated sounding language in reports is a red flag.

P146

The best performing investments have the smallest research file.

P173

Sales always need to meaningfully outpace share growth to create true value.

P178

Over the life of a business regardless of the price you paid you’ll end up averaging the same return as the companies ROIC

P178

If earnings grow at 20% a P/E of 20 is a fair price. Anything below is better.