100 Baggers; Where to Look for the Big Winners

Investing

I was at the Toronto Reference Library this past weekend, and found the investment book gem, “100 to 1 in the Stock Market”. It’s the ONLY original copy remaining in library circulation, published in 1972. I had to make a special request at the library to retrieve it from their archives. I’m kinda a book nerd. Anyway, the author, Thomas W. Phelps uncovered 365 stocks that turned into 100-baggers, within the 1932 – 1971 period, and explained how one could find the next 100-baggers (where each $1 invested grows to $100 or more). I’ve posted below the “the four categories of stocks that have turned in 100-to-one performance records”, as explained by Thomas W. Phelps in the chapter, Where to Look for the Big Winners:


Phelps influenced guys like Chuck Akre (especially on point #4 in the screenshot above) and many other top investors. Here’s what Akre said about “100 to 1 in the Stock Market”, and his own investing journey, in the famous speech – An Investor’s Odyssey: The Search for Outstanding Investments – that he gave at the 8th Annual Value Investor Conference in April 2011, Omaha, right before the annual shareholder meeting of Berkshire Hathaway:

In 1972, I read a book that was reviewed in Barron’s… called “101 to 1 in the Stock Market” by Thomas Phelps. He represented an analysis of investments gaining 101 times one’s starting price. Phelps was a Boston investment manager of no particular reputation, as far as I know, but he certainly was on to something which he outlined in this book. Reading the book really helped me focus on the issue of compounding capital… Here was Phelps talking about 100-baggers, so what’s the deal? Well Phelps laid out a series of examples where an investor would in fact have made 100 times his money. Further he laid out some of the characteristics which would compound these investments. So in addition to absorbing Phelps’ thesis, I’ve been reading the Berkshire Hathaway (BRK.A)(BRK.B) annual reports since I’ve made my first purchase in 1977, so this collective experience moved me along to a point where I’ve developed my own list of critical insights and ingredients for successful investment. 

Akre, who founded Akre Capital Management, coined the term “compounding machines” to describe businesses that are capable of compounding the shareholders’ capital at high rates for long periods of time with little risk of permanent loss of capital. And he came up with a brilliant visualization to explain his investment philosophy, which he called the “the three-legged stool” (he actually has a stool in his office’s main boardroom as a constant reminder).

“(1)The first leg of the stool has to do with the business models that are likely to compound the shareholders’ capital at above-average rates, combined with leg two, (2) people who run the business who are not only exceptional at running the business but also see to it that what happens at the company level also happens at the per share level–and then leg three, (3) where because of the nature of the business and the skill of the manager there is both history as well as an opportunity to reinvest all the excess capital they generate in places where they earn these above-average rates of return.”

Now, I don’t want it to seem like finding, and then investing in 100-baggers is easy. The odds are stacked against us all. But I do believe that the quest, and hard work involved to find 100-bagger stocks makes us better investors. We’re pushing ourselves to turn over every rock to find the possible future winners. That means sifting through thousands of stocks, on multiple exchanges, and reading countless financial statements, and quarterly releases.

In my last newsletter issue, MicroCap Interview, I revealed my micro-cap watchlist. Since then, I’ve decided to experiment in the Canadian micro-cap space. Micro-caps are those companies on the TSX and TSX Venture Exchange that trade below $100 million market capitalizations. Out of hundreds of companies, I selected only 16 stocks (see below – do you own any of these stocks too?). I looked for micro companies that can possibly turn into multi-baggers on the foundation of their unique product/service, large addressable market, long runway to grow, exceptional management, high/steady gross margins, high revenue growth, and in most cases – profitable, cash flow positive, high return on equity (ROE), and return on capital (ROIC) operations.

My Canadian MicroCap Portfolio (est. Aug 2017) –

Namsys Inc
Vigil Health Solutions
Pioneering Technology Corp
Vitreous Glass Inc
AirIQ Inc
DMD Digital Health Connections Group Inc
Redishred Capital Corp
Sunora Foods Inc
Bevo Agro Inc
Imaflex Inc
Diamond Estates Wines & Spirits Inc
CVR Medical Corp
Intrinsync Technologies
Greenspace Brands
Ten Peaks Coffee
Ceapro

I’ll provide updates in the future – hopefully it all works out. I’m well aware that some micro-caps might fail, while others will be average performers, but it’s the 2-3 that possibly turn into multi-baggers that I’m really excited about. Overtime, I’ll invest more capital into the winners, and trim or eliminate the losers, if any decline more than 50%. We’ll see – time will tell. (note – I previously owned 4 micro-cap stocks in my list above – Intrinsync Technologies, Greenspace Brands, Ten Peaks Coffee, and Ceapro, but have now segmented those into my new MicroCap Portfolio).

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