The Wealth Creation Study has meticulously studied the characteristics of 47 stocks that have given 100-Bagger returns in the past 20 years. The salient features of the Study can be summarized as follows:
(i) Find great businesses run by good managements quoting at reasonable valuations:
The Study points out that the key to finding “enduring multi-baggers” is to find great businesses run by good managements. These stocks must be purchased at huge ‘margin of safety’.
This is a no-brainer but it is surprising how often we forget it. In our short-sighted urge to make a quick buck, we ignore this salutory advice and instead chase poor quality companies and suffer huge losses when the tide runs out.
(ii) Beware of “transitory” 100-Baggers which flatter to deceive:
The Study cautions us that there have been a number of “transitory” 100-Baggers which attract a lot of crowd and media attention but which ultimately leads to nasty results and tragedy for investors. Stocks like Satyam, Pentafour, NIIT, Unitech, Jai Corp etc belong to this dubious category.
However, there is also a long list of “enduring multi-baggers” made up of companies whose wealth creation is long-lasting.
The stocks that enjoy this privilige are Infosys, Lupin, Wipro, Motherson Sumi, Eicher Motors etc.
(iii) In the Indian context, 100-Baggers are “Fast & Furious”:
An interesting fact pointed out by the Study is that the average 100x period in India is about 12 years i.e. 47% return CAGR. It is also pointed out that in a given time-frame, 100x investment opportunities are more than 100x investment ideas.
(iv) Don’t fret if you have missed the first bus. 100x stocks present multi-year window of opportunity to buy and own them:
The Study assures us that we need not worry even if we have missed a multi-fold price rise in a potential 100x by not buying into it 1, 2 or even 5 years ago. In other words, when it comes to 100x stocks “it is dawn when you wake up!” Or more accurately, “when the 100x idea dawns on you, simply wake up and buy the stock!” It is emphasized that unlike the worm which goes only to the early bird, the 100x stock is likely to feed handsome returns even to late risers!
Examples are given of Motherson Sumi and Shree Cement which offered the highest number of opportunity-years (11 each). Both these stocks could have been bought anytime from 1994 to 2004, and the stock prices would have risen 100-fold even thereafter. Lupin is another example which offered a 9-year buying window from 1995 to 2003.
Even Infosys, by far the highest multi-bagger, could have been bought any time over the 5 years 1994 to 1998 for a 100x experience. The only – albeit major – difference would be in the price appreciation multiple: 2,900x if bought in 1994 and 209x if bought in 1998 (in both cases, held through to March 2014).
(v) Charecteristics that 100-Bagger stocks generally exhibit:
The Study points out that the analysis of the 100x stocks suggests that their essence lies in the alchemy of 5 elements, namely, the Size (of company), Quality (of business and management), Growth (in earnings), Longevity (of both quality & growth) and Price (favorable valuation). These elements have been formed into the acronym “SQGLP”.
(1) Size: The company should be small and relatively unknown;
(2) Quality: The company should have a high-quality business run by a high-quality management
(i.e. one with integrity, competence and growth mindset);
(3) Growth: There should be healthy growth in the company via a combination of sales volume
and/or price and/or margins;
(4) Longevity: The company should be likely to sustain its quality and growth for a long time;
(5) Price: The stock should be favorably valued.
SQGLP: At a glance
|Element||100x Feature||Checklist criteria|
|S – Size||Company should be small and||•||Small size, ideally both in terms of sales & market cap|
|relatively unknown||•||Low analyst coverage & institutional holding|
|•||Low traded volumes|
|Q – Quality||Quality of business||•||Large existing or potential profit pool|
|•||Favorable competitive landscape|
|• Potential for above cost-of-capital returns|
|Quality of management||•||Unquestionable integrity|
|G – Growth||Growth in earnings||•||Multiplicative interplay of growth in (1) Sales volume|
|and/or (2) Selling Price and/or (3) Margin.|
|L – Longevity||Longevity of quality & growth||•||Assess the company’s CAP (competitive advantage period)|
|• Check whether growth is reverting to mean or not|
|P – Price||Favorable valuation||•||Ideally, enough room for valuation re-rating|
There is also a detailed discussion on several aspects such as Quality of business, Quality of management, Niche opportunity, Dominant market shares, Low competitive intensity, Economic Moat / Competitive advantage, Favorable demand-supply dynamics, Growth in earnings via multiplicative interplay of volume, price, margin and several other factors.
(vi) Have the conviction & patience to hold the stock through thick and thin for several years:
“To make money in stocks you must have the vision to see them, the courage to buy them and the patience to hold them. Patience is the rarest of the three“, the Study quotes Thomas Phelps in 100 to 1 In The Stock Market.
(vii) Seven potential 100-baggers identified:
The best part of the Study is that it is not only theory. Instead, the study has selected seven companies which meet several of the 100x criteria, namely:
(i) Market cap less than INR30b
(ii) Businesses which offer play on Value migration or Niche opportunity
(iii) P/E not over 25x trailing 12-month earnings.
Potential 100-bagger stocks
|Company||Small & unknown||Value Migration /||Favorable valuation|
|(Mkt Cap, INR b)||Niche opportunity||(TTM P/E, x)*|
|Specialized software exports||21|
|Oncology drugs research||24|
|Niche 3-wheeler player||25|