100 BAGGERS--C Mayer--REVIEW-NOTES

 SUMMARY 100 BAGGERS C MAYER

Phelps, look for new methods, new materials and new products- things that improve life, solve problems and allow us to do things better, faster and cheaper.

This was written by a guy who passed away in 1992. Not 2012. Some things don’t change.

Average asset life by sector as of 2013. IT 6.6 years, Healthcare 11.4, Consumer Disc 12.4, Consumer Staples 15.1, Industrials 15.4, Telecommunications 16.1, Energy 17.6, Materials 18.6 and Utilities 29.4.

I thought this was interesting that the sectors most favoured today have the lowest life expectancy.

Our analysis of the 100x stocks suggests that their essence lies in the alchemy of five elements forming the acronym SQGLP…..S-size is small, Q -quality is high for both mgt and biz, G-growth in earnings is high, L- longevity in both Q and G, P- price is favourable for good returns.

I would think that this is widely understood.

The median sales figure for the 365 names (100 baggers) at the start was about $170m and the median cap was about $500m….imply a median p/s ratio of nearly 3, which isn’t classically cheap..

In terms of mgt, the book quotes Outsiders (Thorndike), 1. capital allocation is the CEO’s most important job, 2. Value per share is what counts, not overall size or growth, 3. Cashflow, not earnings, determines value, 4. Decentralised organisations release entrepreneurial energies, 5. Independent thinking is essential to long-term success, 6. Sometimes the best opportunity is holding your stock and  7. Patience is a virtue with acquisitions, as is occasional boldness.

Number 7 is similar to investing imo

A competitive position is important. Regarding the many variables to monitor the book focuses on, “high gross margins are the most important single factor of long-run performance……scale and track record also stands out as useful indicators”.

Some miscellaneous items that the book adds, Don’t chase returns (FOMO/envy), Don’t get bored (patience), don’t get snookered-avoid scams, Do ignore forecasters.

There is some discussion about market crashes and those who invested successfully through the Great Depression. See the paper “Keynes the Stock Market Investor” by Chambers (60pgs, can be downloaded) for details for one plus a few other examples.

100 bagger essential principles- look for businesses that have historically compounded value per share at very high rates, skilled mgt that treat shareholders as partners, and businesses that can reinvest their cashflows in a manner that continues to earn above average returns (important)

The book finishes with a summary of the essential principles of finding 100 Baggers.    

1.      You have to look for them. You only have limited resources to focus on the potential big winners. Don’t shoot for the small plays.

2.      Growth, growth and more growth. Growth should be quality ie, cash and earnings as well as the top line. However, Amazon and Comcast are examples where reported earnings did not occur during the share price rise. They may be unusual. Perhaps one of the most important points in this section is that growth is usually not linear. That breakdowns occur and whether these indicate the end of the story or a temporary pause is a critical point. The answer can only be solved by those who know the company best, those investors will have a better chance of correctly deciding the likely outcome. No free lunches.

3.      Lower multiples preferred. Some discretion is involved here, mentioning PEG ratio.-The peg ratio is one of the most misused ratios, the growth input should be an estimate of long-term growth, otherwise, it makes no sense.

4.      Putting no 2 and no 3 together is powerful.

5.      Economic moats are a necessity. High and lasting ROE or ROIC may be evidence of a moat.

6.      Smaller companies are preferred but do not need to be too small.

7.      Owner-operator preferred, but plenty of examples of successful non-owners though.

8.      You need time. The fastest 100 baggers take about 5 years but normally 20-25 years, so a long journey. There are a lot of behavioural comments to leave winners alone and stay the course.

9.      You need a really good filter. That’s blocking out the daily commentary, media that believes every day something important happens. Many successful shares in the study exhibit massive monthly volatility, it takes enormous discipline to stay the course. Keep looking for great stocks no matter where the market is or where commentators say it is likely to go.

10.   Good luck helps. Luck can go either way, live with it.

11.   Be a reluctant seller. Great stocks are rare, the book has lots of stories of investors selling out at a profit and missing out on much larger returns.

 

Summary-my take- I added to red comments above

Three things stand out to me

1.      The study is US-centric. Of course, the US market is huge and allows companies to grow for many years before they saturate an opportunity. In Australia stocks will saturate the domestic market opportunity more quickly so need an effective international strategy, which adds risk as international expansion will come sooner than US stocks, IMO.

2.      Probably the main takeaway for me is that these were actual businesses making profits, although small with big opportunities. That reduces risk compared to concept stocks. The business even when small still showed underlying strong metrics. Usually not cheap but that is ok as long as you don’t pay crazy prices-your call.

3.      Uncertainty leads to large volatility in the share price and at that point wealth transfers from the less knowledgeable to the knowledgeable. Must know the things that matter in the thesis.

4.      Overall, the book bounces around a bit and many factors put forward are already well known. Probably a 6-7/10 for me.