A 100-bagger is a stock that goes up 100 times your purchase price. While everyone hopes to own a 100-bagger, almost no one does because finding a good stock and holding them to reach 100 times your investment is not easy. In the book, 100 Baggers – Stocks That Return 100 to 1 and How To Find Them, author Christopher Mayer looks at characteristics of 100-bagger stocks. The book was inspired by another book, 100 to 1 in the Stock Market by Thomas w. Phelps. Phelp’s book covered 100-bagger stocks from the 1930s to the 1970s.
Book Summary – 100 Baggers – Stocks That Return 100 to 1 and How To Find Them
It takes time
The stock market, on average, returns 10% per year. Certainly, some stocks return more than 10% per year but to make 100x (10,000%) it takes decades even if your stock returns 25%+.
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These days, most investors don’t own a stock for very long. If you hold a stock for decades, you are likely to be labeled a “bagholder”. But big returns come with time, and patience is key. If you hold a stock for many years, you will inevitably run into periods where the stock underperforms. But history shows that holding on to stock during drawdowns is key to making outsized rewards in the market.
You are not going to find 100-bagger stocks if you don’t do research. Focus your time on energy on finding stocks that will deliver outsized gains. Look through 52-week highs and research new investment themes that are likely to last for decades.
Growth is important
100-baggers tend to be growth stocks – stocks that grow revenue and earnings over time. The company should be able to maintain margins as it grows. Many growth companies may not have earnings in their early years but they should show consistent top-line growth. Stocks that grow the top line by just cutting prices are not likely to perform well.
Stocks with lower multiples are better
You will find stocks that grow 100x among the 52-week highs and not among the 52-week lows. While stocks at 52-week lows may have a lower P/E, those stocks are not likely to deliver big gains. While stocks at 52-week highs are likely to be expensive (higher P/E, P/S, etc.), look for stocks that have lower multiples relative to their peers.
High return on capital
100-baggers have high returns on capital. While return on capital varies by industry, the higher the return on capital, the better the stock returns.
Smaller companies are better
A company that already has a trillion-dollar market cap is unlikely to go up 100x. Look for smaller companies that have room to grow in their market over many years, which in turn will lead to better stock performance.
Owner-operator companies are better
Companies that are led by founders such as Walmart, Apple, and Amazon tend to outperform. Founders in these companies own a big stake in the company and have the right incentives to run the company effectively. Even if the founders leave the company after many years, these companies do well because the founders built the right culture within their companies.
As with anything, luck matters. But if you do things methodically over long periods of time, you increase your chances of landing 100-baggers.
While you may have to sell shares of poorly performing companies, think hard before you sell. Is the underperformance temporary, or will is the stock expected to underperform for years? Every 100-bagger went through periods where the stock was down 50% or more. Having the conviction to hold through these drawdowns is key.
The book doesn’t have any original research but it does give you a good road map to find and hold 100-bagger stocks. The book has a list of 100-baggers stocks in the appendix. Just going through the list will give you the inspiration to find your own 100-bagger.