How to find 100 baggers (stocks that make $100 from $1 invested)

In his book "100 Baggers: Stocks that Return 100-to-1 and How to Find Them" (2014),  Christopher Mayer analyzes the basic components that stocks had to become 100 baggers. The author tries to give us basic guidelines which to respect when you want to find stocks as such. 100 baggers are stocks that turn $1 invested into $100. With this post we try to summarize the author's findings and show you how much the check.markets strategy has in common with it.

• The stock should be run by the owner ("owner operator") or should have a high ownership of insiders.
• The stock should ideally by fuelled by a twin engine (growth in sales and earnings and growth of multiples).
• Many 100 baggers experienced high ratios of stock buybacks over the years.
• Follow the coffee can portfolio strategy. This strategy says to buy stocks and keep it in your portfolio for 10 years at least. Afterwards, the investor can analyze where his stocks have gone.
• To make most out of the coffee can strategy, it's most important to (1) know your business and the factors that influence it (car manufacturers are highly dependent on semiconductor chips, commodities for car parts and expansion of train and publicly usable routes with other means of transport to name just a few drivers), (2) make careful study of the underlying business in order to only buy the best ideas and (3) take into consideration that - following quotes from Charlie Munger - business with margins of 6% will stay with this margin in the long term. Consequently, stocks with net margins of 20% will continue to make 20% on average. The reason why this consideration is so important is that the multiples will decrease by this percentage (earnings, sales, book value, cashflow) in the following years. 
• As mentioned before, investors need strong filters to only get hold of the best investing ideas out there. In order to have 100 baggers in one's portfolio that you can really see on your accounting balance, it is important to invest in 5-6 stocks only. The more you diversify, the more you dilute the performance of your investing ideas. 
• Moats guarantee consistent above-average margins. Moats are well-known since Warren Buffett introduced them as an investing reason and Pat Dorsey published his book on this topic. Moats empower a company to offer products at such a low price that no competitor has any chance to follow (Wal-Mart). But moats can also mean that companies offer their products at such high price levels and still won't lose any customer because they increase the customer's status in his environment (Tiffany's, Ferrari). If you saw these products from a rational point of view, you will never get the money back that you invested for those products because they are worth less. The brand name on this product is the key reason for the high price, not the product itself. That's what moats can do.
• Dilution is a big enemy. Stocks that buy back shares each year decrease the number of stocks available. If you own 10 shares of a stock that has 100 shares available and this company buys back 20, there are 80 shares in total of which still own 10. In the past year, you had 10% ownership of the stock. Thanks to share buybacks, you now own 12.5%. 
• Don't trust or follow analysts, forecasts or macro economic indicators. The reason being is that analysts are indirectly constrained by the company they analyze. In order to gain more inside information on a stock, analysts mostly talk to company officials. If analysts then publish research that shows how bad the situation of this certain company is or how badly it is run, you can be sure this will be the last time this analyst gained detailed information from this company. Analysts have to make some stakeholder management, too. It is most obvious that the good dealership with company officials belongs to the most important necessities in this job. Besides this factor, there is another key factor influencing the accuracy of an analyst's work: prediction. Nobody knows the future, also analysts don't. If you compare the historic predictions with reality, you will see that forecasts are too optimistic on average. What's more to it: Have you ever heard of a study that could predict war, heavy rises inflation or other extremes? That's the problem. If you totally rely on the estimates of analysts or macroeconomists, you won't experience high returns in your portfolio. 
• Experienced investors don't care so much about earnings, they are looking for cashflow figures. Every CEO in this world has a certain toolset. It is the same for every company leader. The first category of toolset is the operating toolset. CEOs take initiatives to decrease costs by (a) cutting personnel costs, (b) improve company structure for efficiency reasons, (c) reduce purchase or input cost or change companies you buy parts/products from (bad comparison, but I have to make it: the same strategy is used for maximizing profits for drug sales) and (d) remove all unnecessary expenses (in the film "House of Gucci" you can see how much corporate money was wasted for private or status-backing purchases by Maurizio Gucci). The second toolset is free cashflow. With free cash-flow you can do four things: (a) repay debt, (b) make mergers or acquisitions, (c) make company investments or you can (d) buy back stock. The best CEOs are the ones that know how to use their toolset best for the very situation that the company is in. CEOs can only use every tool that I described above if there is enough cash that is generated by the business. Mr Mayer found out that it's not the most innovative idea, a certain industry or a certain macroeconomic environment that formed 100 baggers. It's the perfect capital allocation done by CEOs. Capital can only be allocated if enough cash is at the CEO's disposal. 

• are lowly-indebted (if not debt-free),
• generate vast amounts of cash (and have high margins),
• use their FCF to for stock buybacks and or dividends (dividend + buybacks = adj dividend),
• have high and consistent profit margins,
• lead their sector and industry and
• reach their all-time-high (ATH)

What divides us from the guidelines from 100 baggers is that 

• check.markets is interested in the market prices as an indicator for the robustness and strength of markets (and trends)
• check.markets does not like low performers. The algorithm currently tries to only invest in promising upward trends that can halt but should turn.
• check.markets does not yet regard the twin engine that much as it concentrates on the fundamentals and the current market prices.

After the next buying signal from check.markets, we will see how promising the new ATH candidates are. By now, we feel to follow the right strategy. While markets YTD have performed this way:

• S&P 500 (-12,7%)
• Nasdaq 100 (-19.9%)
• DAX (-13.7%)
• EuroStoxx50 (-14.0%),

check.markets Wonderfolio managed to decrease only by -4.6%. (https://www.wikifolio.com/de/at/meine-wikifolios/trade/wf00wonder)

Although you can never be proud of producing negative returns, we are proud to trust companies that investors don't punish as hard as others. The secret may be split in two reasons:

We have invested in companies that don't or hardly have any connection to Russia or Eastern Europe

We have invested in companies that are not at all debt-sensitive. Our investments have debt/equity ratios below 0.1 and can pay them off within 1 year. 

So, all in all, you can see that we engaged a lot with our investments to now be in the position to experience quiet nights. Other investors currently suffer from tough times. We do so too sometimes. But by adapting to the macroeconomic extremes (interest rate changes, Russian war), we do our best to position ourselves best to own a low volatile but growing portfolio.

We will test how much we could use this book to lever our results. We are confident that our strict filters help us to profit from similar returns in the future. Time is key. And we give our algorithm this time to evolve.