Peter Lynch first used the term “10-bagger” to describe stocks multiplied in value tenfold, or 10 to 1. In his fantastic book, 100 Baggers, Christopher Mayer, portfolio manager and co-founder of Woodlock House Family Capital, extended the idea to discuss stocks that 100 to 1.
In today’s crazy world, finding companies that can multiply their value by 100 might seem unlikely. Mayer’s great book outlines the ideas behind locating these companies and buying and holding these companies.
The study included in the book covers the period from 1962 to 2014 and outlines every company that returned $100 from $1 invested. There are 365 companies during that time in the study, which is outstanding if you think about it. We might think this idea only applies to the great growth stories dominating the markets today, but it applies to any investor looking for long-term growth from great companies. Remember that Amazon and Google started somewhere and grew to the market makers they are today.
In today’s post, we will learn:
Okay, let’s dive in and learn more about 100 baggers.
What is a 100 Bagger?
A 100 bagger is a stock that grows from $1 to $100, simple, huh? But the growth required to achieve this type of growth is another story.
Think about the likelihood of companies growing this much; for example, if Amazon would grow to become a 100 bagger from today’s price of $3,101 would require a price of $310,100!! Going to a ten-bagger, which is 10 to 1, would require a price of $31,010!
No one will argue that Amazon is not a growth machine, with revenues growing at 28% annually over the last decade; it is unreal. But to grow 100 times in stock price requires more than revenues; we also need growth in margins and earnings per share (EPS).
In addition to the growth in revenues, margins, and earnings, we also need time; Mayer discovered that it takes on average 26 years to become a 100 bagger. Bottom line, this is not a get-rich-quick scheme.
You might think that we need a company the size or dominance of Amazon, Google, Microsoft, or Apple to become a 100 bagger, but that is not the case. They don’t always need a huge market or TAM (total addressable market); they also don’t need broad market appeal. In many cases, they were THE player in a small niche in which they dominated for a long period.
In the study, Mayer found that around 300 companies achieved 100 bagger status between 1962 and 2014. The quickest a company achieved that status was 16 years, while the longest took 45 years. Let’s look at a chart so we can wrap our heads around the amount of annualized growth required to achieve 100 bagger status.
Compounded Annual Growth
Years to 100 Bagger Status
I am not sure about you, but that chart caught my eye. Think about the level of performance it would take to grow revenues, margins, and earnings at 35.9% for 15 years. That is some serious operational execution.
One of the investors that inspired this study was Chuck Akre, who manages Akre Capital Management. Akre is one of the greatest investors out there that not many know about; he has several 100 baggers under his belt.
There is a fantastic classic speech entitled: Chuck Akre, an Investor’s Odyssey: The Search for Outstanding Investments” that is highly worth checking out.
In the speech, Akre talks about a great book he read that inspired him to search for excellent investments or 100 baggers. Thomas Phelps wrote the book in 1972, called “100 to 1 in the Stock Market.”
Akre implemented Phelps’ ideas in his three-legged stool investment philosophy:
- Businesses that have compounded value per share at very high rates, historically;
- Employ highly skilled managers who have a history of treating shareholders as partners; and
- Businesses that can reinvest free cash flow in a way that continues to earn above-average returns.
Akre is an outstanding investor himself, and if I can highlight him a little bit, then all the better.
Where Can I Find 100 Baggers?
This section will break down by finding 100 baggers and some of the characteristics we need to find them; one thing to keep in mind is luck in any investment. Just because we think we have found the greatest company in the world doesn’t mean that the market will agree.
First Step: Start with Small Companies
Our first step includes finding companies that mathematically have the chance to become 100 baggers. As we discussed earlier, a large company such as Amazon would have to grow at great sizes to become a 100 bagger at this point in its existence.
Large companies or large-cap stocks such as Apple, Facebook, or Google are great companies and can be fantastic investments, but they are too big at this point.
Consider Microsoft or Apple, which have market caps of at least $1 trillion, to grow 100 times from $1 trillion takes a bit of creative imagination to achieve. To achieve that size would make it around five times larger than the U.S.’s entire GDP, not likely.
Instead, we need to focus on companies that are much smaller in scale, say micro-cap or small-cap companies that have market caps of $300 million to $1 billion. While small, they do have a track record of reaching those sizes, which means we don’t need to find Bill Gates in his garage working on the next Microsoft.
There are around 4,000 companies listed, and to find our 100 baggers, we should start with the microcaps and work our way towards small caps. But don’t start with the smallest of small because the risk level increases the small down the food chain we go.
A better idea, according to Mayer, is to work between $300 million to $1 billion in market cap and look for annual sales in the range of $175 million.
Second Step: Twin Engines of a 100 bagger
All the 100 baggers of the last fifty years have one thing in common; growth and lots of it in all forms.
Mayer suggests that we should invest in companies with growth in revenues and expanding valuation multiples. For example, growing sales combined with growing the price to earnings multiple Mayer calls the “twin engines” of growth.
Revenue growth is a must to achieve 100 bagger status; it will not happen without the revenue growth. A bonus is if the growth in revenues filters down the income statement to earnings. Because as the growth filters down, it helps expand the P/E multiple.
However, this is not a necessity. For example, Amazon has experienced ridiculous revenue growth over the years, but its earnings have lagged that growth.
What we are looking for is a company that is a disruptive business model or product. And that the company is reinvesting its earnings in the business to become even more competitive. As Warren Buffett likes to say, “the best businesses are those that can compound its capital at high returns on invested capital.”
We want companies with high ROIC multiples over long periods, plus they are reinvesting those cash flows in the company. Dividends and share repurchases detract from the company’s growth, and we would rather have reinvestment in growth.
The above is the growth engine; the following is the multiple expansion.
In the beginning, the multiples of 100 baggers aren’t too expensive, but as growth begins and continues, the multiples expand.
For example, say a company has a P/E ratio of 15 with $200 million in sales. If the company can grow its revenues by 100 percent, the stock price will increase by the same percentage, assuming that the profit margin and multiples remain the same.
Two hundred percent growth in sales equals a two hundred percent increase in price.
But what if we change that up?
Let’s say the company grows revenues by one hundred percent and one hundred percent in valuation? When the two aspects increase in tandem, we don’t get two hundred percent increases; instead, we get a three hundred percent in the stock.
The opposite of this effect is if the company is at a high valuation, the company will need to achieve very high revenue growth to compensate for the high valuation.
A better way is to find high growth revenues at cheaper multiples. Differently, don’t pay up for high revenue growth because it will detract from achieving 100 bagger status in the long run. Instead, try not paying too much so we can enjoy the twin engines of growth.
Third Step: Owner/Operators
According to Mayer, the management drives a company’s bus and equals great management to 100 baggers.
Finding companies owned and operated by the company owners means they tend to think like owners and treat shareholders as part owners. The owner/operator has skin in the game as most of their wealth is tied to its performance. Those incentives tend to enable management to align their goals with shareholders.
A great example is Jeff Bezos; he started Amazon when he was 30, he is now 55 and owns 12% of Amazon, and his entire wealth is connected to the company. Because of that incentive, we can be sure he will not make some short-sighted decision to benefit himself; rather, he will look for long-term goals to improve the company.
Another great example of this is Warren Buffett. His entire net worth is tied up in Berkshire Hathaway. He treats all of his decisions as if they matter to him personally and those invested in the company. For more insight into Buffett’s thoughts on management behavior, check out this link.
Step Four: Coffee Can Portfolio
The coffee can portfolio idea dates back to when people would hide their valuables in coffee cans instead of depositing them in a bank and putting it under their mattresses.
The same idea applies to investing in potential 100 baggers. Pick the best companies we can find, then hide them in our coffee can. Keep in mind it takes an average of 26 years to achieve a hundred bagger.
Mayer uses the analogy of investing and fish. If you drop a hook with bait and the bait moves, the fish will bite. But if the bait doesn’t move, the fish ignores it and moves on.
The same idea applies with stocks; if the stock moves, the investor pays a lot of attention, but if the stock doesn’t move much, investors are likely to sell it for lack of action. And if the company underperforms, we are likely to sell.
For example, the 100 bagger Monster Beverage lost 20% on several occasions and once lost 40%. But only by holding on were investors able to achieve a 100 bagger return, considering Monster achieved a 100 times return in only ten years!
Many of the greatest investors tell us that the greatest enemy to our returns is ourselves. The emotions of greed, fear, and many more get in our way.
The coffee can idea allows us to avoid this unforced error. After investigating our companies and making our decision, put it in your coffee can and forget about it. Take it from Buffett, who said it best, “the stock market is a device for transferring money from the impatient to the patient.”
Step Five: Ignore the Macro
Investigating companies to find the next 100 bagger takes lots of time and effort, but what happens with the Fed, who is the President of Italy, or what is going on in China matters not one iota.
Ignore the macro situation because the 100 baggers we are searching for will continue their progress regardless of the macro situation. Management doesn’t spend a lot of time worrying about the interest rates or what someone says on CNN. They only focus their attention on the products and services they offer consumers and improve their performance.
For example, the company Dollar Tree was able to grow its revenues 7.5% from 2007 to 2008, in the heart of the Great Recession, while also increasing the share price from $7.5 to $14. That is an almost 100% increase, not too shabby, especially considering the S&P 500 lost almost 40% during the same period.
Timing the market is hard, so don’t try. Instead, focus on the task at hand and search the market for the best companies.
Examples of 100 Baggers
Among the small companies we are looking through is the next:
- Starbucks began in 1971 in Seattle as one small store selling coffee before becoming today’s company worth $128 billion.
- Apple began in a garage in 1971 before becoming worth $2.98 trillion
Just because the micro and small-cap companies we need to find for our 100 baggers start small doesn’t mean they can’t grow into much bigger companies.
To find 100 baggers, we need to move beyond the large-cap companies such as utilities or more mature companies such as McDonald’s, Walmart, or IBM.
Below are some companies that have become 100 baggers in the last fifty years:
Years to 100 bagger
That’s quite a diverse list, and yes, that Berkshire Hathaway!
The above list is a small sampling of the 365 companies to return 100 percent over the last fifty years. The list includes companies from retail, banking, beverages, and tech. Most associate tech with 100 baggers, but it can come from anywhere. The most important item is growth, growth, growth.
The myth that we need to start with very small companies is not true; instead, starting with $175 million in revenues and a median market cap of $500 million gives us a substantial company and less risk.
Other companies from the list include:
- Dollar General
- Lockheed Martin
All the above companies started small but grew to dominate their niches. Take Aflac, for example; in 1982, the company had $585 million in sales, and by 2002 it had become a 100 bagger with $10.2 billion in sales. Also, Aflac’s price to sales improved from 1.7 to 5.4, giving the company the twin engines of growth with revenue growth and multiple expansion. Revenues for Aflac grew 17 times, while the price to sales grew almost three times.
Some of the fastest companies to achieve 100 bagger stardom:
Years to 100
Bottom line, 100 baggers are achievable; we need to look in the right places for the characteristics described in the post. They will not appear out of thin air; it will take time and patience to find them.
100 Baggers by Christopher Mayer is a wonderful book, well-researched and thought out with many great examples to inspire us to find great investments.
If I haven’t recommended the book, go out and get it, the book is an easy read and has some great insights.
Many of today’s growth investors focus on the big companies with lots of growth potential, such as Salesforce, Crowdstrike, Zoom, or Tesla. While all of the companies are great businesses that are disrupting their industries, their ability to achieve 100 bagger status is unlikely.
Consider Crowdstrike, which is currently trading for $206. For it to grow 100 times, it would have to be worth $20,600. Or for Tesla, which is trading at $700, to grow to $70,000 a share. Both are not likely, which doesn’t mean they can’t still be good investments, but 100 baggers are not likely.
Instead, to find these great companies look for great revenue growth with the ability for multiple expansion, owner/operators, and a track record of reinvesting in itself.
With that, we will wrap up today’s discussion.
As always, thank you for taking the time to read today’s post, and I hope you find something of value in your investing journey.
If I can be of any further assistance, please don’t hesitate to reach out.
Until next time, take care and be safe out there,