100 Baggers: Stocks that Return 100-to-1 and How to Find Them studies businesses that achieved 100x returns over time. The author admits to a blind spot in his research—he doesn’t analyze companies that failed to reach this milestone. The goal isn’t strictly scientific but is intended to highlight patterns among these successful businesses and provide practical advice for similar investments.
Unlike more technical texts, this book aims to inspire readers to believe in the potential of achieving 100-to-1 returns on a single stock. I find it particularly useful due to its concrete examples and insights into the characteristics of these high-return businesses, including size and other key indicators.
Be patient to allow the business to become a 100 bagger
A consistent factor across 100 baggers is growth in sales, margins, and valuation.
The “alchemy” of 100 baggers often involves these five elements:
- S—Small size: Smaller companies have more room for growth.
- Q—Quality: High-quality operations and management.
- G—Growth: Strong earnings growth.
- L—Longevity: Sustained quality and growth over time.
- P—Price: Favorable initial prices for good returns.
This process requires patience. For example, a stock returning about 20% annually over 25 years can become a 100-bagger. However, if sold in year 20, the return would only be around 40-to-1, pre-tax. The last five years more than double the return (assuming a steady annual rate). Therefore, patience is essential, boosting both returns and tax efficiency.
How to spot hundred baggers
High ROE Stocks
Jason Donville from Donville Kent Asset Management emphasizes several key points:
- Return on Equity (ROE) is crucial: ROE is a critical metric for assessing a company’s ability to generate returns on its equity.
- Invest in companies that reinvest effectively: Companies that reinvest their profits at high rates of return increase their book value and multiply shareholder wealth over time.
- Stock price and ROE alignment: Over time, a company’s stock price tends to align with its ROE. Thus, companies with consistently high ROEs are likely to see stock price growth.
- Focus on fundamentals, not market noise: Short-term market movements can be distracting, but focusing on fundamental metrics like ROE and a company’s ability to reinvest profitably is a better strategy for long-term success.
Resource: Donville Kent Asset Management – ROE Report
“If a company has a high ROE for four or five years in a row—and earned it not with leverage but from high profit margins—that’s a great place to start.”
Sustained high ROE requires skilled management, especially in capital allocation.
When asked about selling, Donville states, “If the ROE doesn’t fall below 20%, generally, I don’t sell—unless the valuation gets stupid.” He prefers companies with strong insider ownership, which aligns management’s interests with shareholders’ and encourages cautious decision-making.
Owner-Operators: Skin in the Game
Interesting fact: Owner-operated companies are poorly weighted in ETF funds, as fund managers tend to favor large, liquid stocks. For example, the S&P 500 uses float-adjusted weighting, meaning the more Warren Buffett buys, the less Berkshire Hathaway is weighted in the index.
Research supporting the outperformance of owner-operated companies includes:
- Joel Shulman and Erik Noyes (2012): Billionaire-managed companies outperformed the index by 7% annually.
- Ruediger Fahlenbrach (2009): Founder-led CEOs invested more in R&D and focused on long-term value.
- Henry McVey and Jason Draho (2005): Family-controlled firms avoided quarterly guidance and outperformed peers by focusing on long-term gains.
Investing in a company is akin to entrusting them with your capital. Matt Houk’s strategy involves billionaire-led stocks, with listings publicly available: Horizon Kinetics.
Finding the Best CEOs
Thorndike’s book The Outsiders highlights the importance of great CEOs who excel in capital allocation. CEOs generally have five options:
- Invest in existing operations.
- Acquire other businesses.
- Pay dividends.
- Pay down debt.
- Buy back stock.
Thorndike emphasizes that great CEOs understand:
- Capital allocation is their most important job.
- Value per share matters more than overall size or growth.
- Cash flow determines value, not earnings.
- Decentralized organizations unleash entrepreneurial energy.
- Independent thinking is key to long-term success.
- Sometimes the best opportunity is holding your own stock.
- Patience and boldness are virtues in acquisitions.
These CEOs share “old-fashioned, pre-modern values” and are often “deeply iconoclastic,” distancing themselves from financial hubs like New York City.
Moats
A company’s competitive moat can take many forms
- Brand strength: Companies like Tiffany’s and Oreo have strong brands, which create loyalty and recurring customers.
- High switching costs: Banks are a great example, where switching costs keep customers with the same bank for years despite minimal product differentiation.
- Network effects: Microsoft and social media platforms like Facebook benefit from network effects, where the value of their products grows as more people use them.
- Cost leadership: Companies like Walmart and Interactive Brokers maintain a moat by being the low-cost provider in their industries.
- Size advantages: Being the biggest player, such as Intel or Walmart, can be a moat. Relative size also creates a moat in niche markets.
Gross margin as an indicator of moats
Credit Suisse HOLT® research indicates that fewer than 50% of public firms survive beyond 10 years, underlining the need for a strong moat. Matthew Berry’s unpublished paper on mean reversion in corporate returns notes that high gross margins are a top indicator of long-term success.
High gross margins reflect the price customers will pay relative to costs, indicating the company’s value. In essence, identifying a moat is crucial, and high gross margins are a common sign of one.
Essential Principles for Finding 100-Baggers
Charles Akre’s approach to 100-Baggers
Charles Akre, a successful investor, distilled his approach to making 100 times your money into a simple philosophy. His core strategy, often referred to as a “three-legged stool,” focuses on:
- Businesses with high historical returns on capital
- Skilled management teams that treat shareholders as partners
- Companies that can reinvest profits at high rates for many years
Key Lessons from 100-Baggers
- Look for Big Opportunities: You must actively seek stocks that can grow 100 times, focusing on long-term potential instead of short-term gains.
- Growth is Critical: The best 100-baggers grow both their sales and earnings significantly, with “good growth” that adds value without excessive dilution or cuts to profitability.
- Lower Multiples Are Preferred: Avoid overpaying for stocks. Paying a reasonable price increases your chances of benefiting from long-term growth.
- Economic Moats Matter: Companies with strong competitive advantages can sustain high returns on capital over long periods, which is crucial for compounding.
- Smaller Companies Offer Better Potential: Smaller businesses have more room to grow, making them better candidates for achieving 100-fold returns.
- Owner-Operators Are a Plus: Firms led by visionary leaders with significant ownership stakes often perform better because management’s interests align with shareholders.
- Time and Patience Are Key: Finding 100-baggers takes time. The “coffee can” approach—holding stocks for the long term without interference—is an effective strategy to resist the urge to sell too early.
- Ignore Market Noise: Focus on the business, not the stock price or market speculation. Many successful 100-baggers experience significant price volatility, but their business fundamentals remain strong.
- Luck Plays a Role: While diligent research is important, sometimes external factors like new innovations or unforeseen changes in the market can turn an investment into a 100-bagger.
- Be a Reluctant Seller: The best strategy is often to hold onto great stocks, even through downturns, rather than selling for short-term gains or based on temporary market conditions.
Final Thought
There is no magic formula for finding 100-baggers. The key is to focus on businesses that can compound their earnings over time and to stay patient, allowing the power of compounding to do its work.
If you are interested in researching 100 Baggers stocks, the author provides a list of a few hundred of these extraordinary companies.