Can We Pick the Next Biggest Stock-Market Winners? – Chris Mayer, Author, 100-Baggers

"You're asking all the wrong questions!"
“You’re asking all the wrong questions!”

How do you find the stocks that are most likely to return 100-1 gains?  That’s the question Chris Mayer wanted to answer.
After a year-long study of the biggest performers of the last 50 years, Chris believes he’s gathered a “template” of the main characteristics of top performers.
Chris was a corporate banker before joining Agora Financial as an editor in 2004.  He recently released his findings in a new book, 100-Baggers.
I asked Chris about his findings and how they might apply to resource stocks…

 

Submitted by Henry Bonner, Sprott’s Thoughts:

 

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Henry Bonner: Hi. This is Henry Bonner. I’m speaking today with Chris Mayer, author of Mayer’s 100-Baggers Club at Agora Financial. How are you doing today, Chris?

Chris Mayer: Doing well. Thanks for having me on.

Henry Bonner: Nice to talk to you Chris and I know recently you came out with the idea of making money by investing in potential 100-baggers.What is a 100-bagger and what kind of research have you done about them?

Chris Mayer: Well, a 100-bagger is a stock that returns 100 to 1. So that’s enough to turn a $10,000 investment into a million dollars. For the last year, I’ve been studying 100-baggers of the past and my study covered stocks from 1962 through 2014. I came up with 365 names and I published all the results of the study in a book came that came out in September. It’s called 100-Baggers.

The idea was to look at these past stocks and come up with a kind of template — the characteristics that we could look for and use to find stocks today. That was a pretty simple project and I’m pretty pleased with the results.

Henry Bonner: So do you think that the characteristics that you come up with are predictive, meaning that you can get an idea of whether a company could be a 100-bagger by comparing it to past 100-baggers?

Chris Mayer: I would say that not all the 100-baggers were predictable, and I write about this in the book. There is a number of them that you just have to say were not predictable. They are companies that have invented something new or hit an oil gusher or something else happened that no one could have predicted.

I would argue that Apple is really not predictable. No one could have predicted back in 2002 when it was on the verge of bankruptcy that they would invent whole new markets– the iPod, the iPad, the iPhone.

So what I tried to do in the book is focus on those that were predictable. The key really to a 100-bagger and – again I talked about it from the book—is what I called the first law of 100-baggers and it comes down to a math problem. To turn $1 into $100, you need to compound that at a higher rate for a long period of time. So for example, if you can compound at 25% a year, then at the end of 20 years you’ve got 100 to 1. Now you want to find companies that can generate that high return on capital and can do it again and again and again.

Henry Bonner: Are you looking at a company that will become a 100-bagger over any kind of timeframe or do you have a specific amount of years where a company would have to become a 100-bagger?

Chris Mayer: Yeah, good question. What I tell people is that we want to do it sooner rather than later. I’m not really interested in finding stocks that you have to wait 40 years before you can get your 100 to 1. If you look at the study, there were quite a few that did it inside 10. A company like Monster Beverage is one that I spent some time in the book talking about; it’s one of the case studies I went through.

So you can do it in a shorter period of time. What that means of course is you need to compound at a higher rate. So to do it inside 10 years, I think the return is close to 50% a year. I don’t know too many businesses that can do that but there certainly are some.

That’s really the key to understanding the whole 100-bagger project. You need that high rate of return and then you need time. It’s like what Charlie Munger said. He said that understanding both the power of compound interest and the difficulties getting it is the heart and soul of understanding a lot of things. That’s really a nice piece of wisdom that you should remember.

Henry Bonner: So what are some of the characteristics that you’ve come away with in looking for 100-baggers?

Chris Mayer: Well, one of them I’ve already told you about is a high return on capital and that’s really important. So what does that mean? If you look at a business and it has $100 invested in it and it generates $20 profits at the end of the first year — say $20 cash profit the end of the year — then that’s just a 20% return on capital. Better if they can take that $20, reinvest it back in. They have $120 and you can earn 20% on that again. Then you start to get that flywheel effect. You really get astounding wealth that way.

One story I like to tell is that if you take a penny and you double it every day for 30 days, what do you think you get? The number is a lot higher than most people would intuitively guess. They might throw out $100,000 or $500,000, even a million dollars. But the real answer is $10.7 million, so it’s an application of that higher return of capital over time.

So when we look at businesses, we need to find businesses that can do that. We need to find businesses that have a competitive advantage. We need to find businesses that have paved a long runway to grow and this is a key thing too. A lot of new businesses started out small and they just grew and grew into national and even global market.

Some of these examples you know already. When people think about the biggest winners in the last half century or so, you think of stocks like Coca-Cola, McDonald’s, and Home Depot. All these stocks started out small, grew across the country and then eventually grew into global franchises.

They need that long runway. It helps to start small. If you think about a stock like Apple, where they have a $650 or $700 billion market cap today, that’s not like they’re going to be a 100-bagger. I mean it’s enormous.

So those are a couple of important factors. Another one that I spent in the chapter on the book that I think is really important and people have a tendency to overlook is the ownership involved. It helps to have a brilliant entrepreneur who owns a lot of stock at the wheel. When you think about Apple, it’s Steve Jobs.

I can actually name a bunch of people. I wouldn’t even need to name the companies and we would know what I’m talking about. So if I were to say Sam Walton, everybody knows that’s Walmart. There are a number of several examples — Jeff Bezos, Bill Gates at Microsoft, Warren Buffett at Berkshire Hathaway. Berkshire Hathaway is actually a top-performing stock in the study.

Berkshire Hathaway went up 18,000 fold. So a $10,000-investment turned into $180 million. It’s really remarkable when you look at it. So those are some of the basic characteristics that I talk about in the book and I think are important to look for.

Henry Bonner: Are you still seeing examples of companies that are like that out there today that you can buy?

Chris Mayer: I think we have come up with a few interesting examples. I don’t know if you want me to talk about them now – I guess you do…

Henry Bonner: Well, in retrospect, it’s easy to see what companies had brilliant ideas that were able to compound over time. Are there companies out there today that you think have that ability to become 100-baggers? Are they concentrated in some sectors like biotech or tech or are they widely-dispersed throughout different parts of the market?

Chris Mayer: Well, that’s what I mean when I say you can’t know for sure. One of the things I like to tell people is that we have a template of things that we know work and we’re looking for those things. Not every company that fit the characteristics is going to be a100-bagger. But the idea is really to focus on those stocks that have these characteristics in common with the big winners over time.

So I don’t want to mess around with something that might make 30% here or 50% there or a stock that might double, because the fact is you get a certain amount of these wrong anyway. Things happen. Nobody can predict the future.

So what I think makes stocks interesting is that there are some that offer that really big upside. So even if you are wrong, maybe you make five times your money if something happens. So I’m shooting big and that really creates a margin of safety.

So you asked another good question there which was about whether they were concentrating in any industry and first I will tell you that from the historical study, there was no real concentration and that might surprise a lot of people.

It’s not like it was loaded up with tech stocks and biotech or things like that. In fact, it was a pretty balanced list. There were a lot of different companies and a lot of different things. There were a couple of resource companies. It was spread out across all different industries. So I would say it’s not really dependent at all on the industry and the ones we’re finding now do a variety of things. We’ve got companies in sectors from healthcare to technology. We have a holding company that perhaps mimics Berkshire Hathaway. So I think the characteristics we’re looking for span the whole gamut of sectors.

Henry Bonner: Do you apply Warren Buffett’s principle of investing in businesses that you can understand?

Chris Mayer: Yeah, that’s a good question and I would say yes. That’s one of my filters and I think that’s important. A lot of these 100-baggers were simple businesses. They were things you can readily understand and not necessarily all of them. I mean there are some businesses that are more complicated. But there are a lot of good businesses that do very simple things. There are insurers and food companies like Campbell Soup, Deere and Hewlett-Packard, Macy’s department stores, or Sears.

There are a lot of those kinds of basic businesses. I think it’s important that you understand the business for a reason that most people might not think of initially.

When you buy a stock, you’re going to hold on to it for a long time — that’s your idea anyway.

There are big swings and I go through a number of them in the book just to get people to understand some of the volatility inherent in some of these stocks.

Apple had two different draw-downs where it was more than cut in half and that was not an uncommon experience with a lot of these 100-baggers. Monster Beverage, which was a 100-bagger inside of 10 years, had several times where it dropped 40% in a month. So think about it. If you get wrapped up in market prices, then you’re going to get shaken out of a lot of these.

I would say that if you don’t understand the business, that makes it a lot harder to hold. Then you’re subject more to innuendo and all the gossip that goes on in a market and if you don’t understand it, somebody writes a column that’s critical of a company and telling you why it’s not going to work, you’re going to believe it and you’re going to sell it.

But if you know the business and you understand it, you will be able to say, “Well, this article maybe made some good points but I know X, Y and Z and I’m going to hang on to it.” So a big part of getting the 100-bagger is discipline, being able to hold on to stocks in the face of a lot of volatility.

I have a chapter in the book where I give people my favorite crutch to that which I call the “coffee can portfolio”. This is an idea I got from Robert Kirby who was a money manager at Capital Group and he wrote an article in the Journal of Portfolio Management in 1984 called the “coffee can portfolio”.1

Well I mention this experiment because he talks about how he has this client and he manages her money and does this for like ten years and then her husband died and he gets the husband’s account also and he finds out that the husband has been piggybacking on all of the recommendations that he made to the wife’s account.

But there’s one important difference which is that he never sold anything. He just held on to all these stocks and then what Kirby found is that the husband’s portfolio way outperformed the portfolio that he was managing, the wife’s portfolio, where he was diligently buying and selling these different recommendations.

In fact there are a number of stocks that were worth the entire wife’s account. So it struck him as an interesting insight. Basically the idea is ‘benign neglect.’ The ‘coffee can’ is where you buy a stock and then you forget up to 10 years. The idea is whatever you put in the coffee can, you’re committing yourself to hold for a ten-year period of time. It’s an interesting crutch to get you through the rough patches.

Henry Bonner: Do you concern yourself with the overall market? Is there an argument that some of the returns from for instance the ‘coffee can’ portfolio came because that might have been a period of bull market in overall stocks? And if the market is reaching a peak right now, would it put a dent in that strategy?

Chris Mayer: I think market returns will certainly influence how you do. What I would say is that you can’t predict ahead of time when the market is peaking. People have been saying the market has been peaking for several years, for example, and I remember 2013 very well. The market went up almost 30 percent and there were a lot of people calling for a crash before then.

So there’s always going to be market timers who are going to try to tell you when to sell and when to buy the overall market. But I don’t believe that that’s a really good strategy because –there’s a lot of evidence about this– people are not successful market timers and it’s very hard to call tops and bottoms consistently. You get one half of it right. When do you get back in? And I think that’s a much more stressful way to invest. You have to get a lot of things right.

You also incur the cost of doing that. So when you sell, when you have a profit, you get a tax to it and you got other transactional costs. The fee base can be small but nonetheless, there are costs associated with these things whereas if you own a stock and you can hold it long term even if there’s a dip in the market, you maybe have the opportunity to add to your holdings rather than sell.

So I think the other important takeaway from the 100-bagger study that really struck me was how little the big picture mattered when you really got the stock right. I mentioned Apple because most people know how well Apple has done. But think about Apple over the last 15, 20 years. You got two different times when the market has been basically cut in half and it would have been a mistake to sit and try to play the game of trying to guess when you get in and out of Apple. If you just sat on the thing, it would have gone up more than 100-fold (see Bloombergchart below of Apple’s performance from 2003 to today).

Look at a stock like Amazon, which went public at what seemed to be an outrageous price in 1998.

You had the 2000 tech bubble, where I believe Amazon’s stock price sold 80% down from that peak. You had the ’07, ’09 finanical crisis which cut it deeply again but if you were in Amazonsince the IPO you’re up almost 300-fold today (see Bloomberg chart of Amazon.com stock from 1997 to today).

AMZN US Equity (Amazon .com Inc )  2015-09-25 13-01-57

So the evidence seems to me suggests that if you get the stock right, and you can sit with it, then getting the timing right in the market is not as important.

Henry Bonner: When you look at resource stocks in particular, where it seems to be a cyclical industry compared to other sectors, is there a component of market timing when you look at 100-baggers or is it also looking at business models as opposed to trying to time the market?

Chris Mayer: I would suggest to focus on the business models. Now, there were a number of 100-baggers that were very, very cyclical. I mean Canadian Natural Resources was one that comes to mind. That was a 100-bagger  and that’s an oil and gas company.

Very cyclical. A lot of ups and downs (see Bloomberg chart below of the stock price from 1992 to today).

CNQ CN Equity (Canadian Natural  2015-09-25 13-13-35

They had tremendous assets and a great ownership group. But maybe you’re going to make the argument there that you sit through the oil and gas peaks. But in general what I try to do is when I’m looking at commodities, I think a lot of those basic things that I said before apply, which means yeah, you really want to find a company that can compound capital at a high rate for some period of time and there aren’t that many in the resource world but there definitely are some.

When I was in Vancouver, in my presentation, I went through the example of Royal Gold. So Royal Gold doesn’t do any mining itself. It gets a percentage of what comes out of the mine basically and like an income.

I compared Royal Gold to Coca-Cola and see that Royal Gold is actually a better business than Coca-Cola, because I think that Royal Gold has something like 24 cents for every dollar of sale, fall to the bottom line whereas with Coke, it’s like 15 cents for every dollar.

So objectively it’s a better business. I even compared Royal Gold to Apple. So there are businesses in the resource world that are like that and generate a lot of cash. I would argue even that something like Sprott Inc. itself is a good example of a business that has some of those characteristics. It’s debt-free, trades at a relatively low multiple, generates cash and has a lot of upside to the resource market. There’s precedent for that, like US Global Investors during the last run-up in commodities. I think that was like a 50-bagger.

So I think it’s tough in the mining business because of that cyclicality like you mentioned. So there are a lot of things that probably we wouldn’t bother with. I’m not really looking at some of these mining companies or some of these companies that basically just have a deposit. That’s a different game. But I do think there are some business models in the commodity world that are appropriate and that would fit this 100-bagger template.

Henry Bonner: Is there anything else that we should add for listeners who want to learn about the 100-bagger idea?

Chris Mayer: Well, I hope they start with the book. I think that’s a great statement of the whole project and what it’s about. Hopefully they will join me in my newsletter as I look for more of these things.

In the course of doing this research, I met with a number of really good investors and one of them was a guy named Chuck Akre. He has been around a long time and has a great track record. There’s a chapter at the end of the book where I write about my meeting and interview with him.

I’ve met with a number of great investors and one thing in common when I talk with them is that they don’t really talk about things that a lot of investors spend a lot of time thinking about.

So, I met with Akre and we didn’t talk about the Fed. We didn’t talk about the dollar. We didn’t talk about geopolitics or currencies. He really talked a lot about businesses and business models and people and ideas and things that you could hold on to for a long time.

So it’s not that any of those things aren’t important. I think they’re very important and can be important but they’re hard to predict and are perhaps highly unpredictable. I think that investors should try to master just the handful of essentials that I talk about in the book, and I think their investing results will vastly improve.

Henry Bonner: And the name of your book again is …

Chris Mayer: It’s 100-Baggers. Easy to remember. Stocks That Return 100-to-1 and How to Find Them.

Henry Bonner: Well, thanks a lot Chris and look forward to speaking with you again.

Chris Mayer: Great. Thank you Henry.

1 http://www.iijournals.com/doi/abs/10.3905/jpm.1984.408988

 

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