Growth

Question 1

What is the formula for sustainable growth rate?

Answer 1

ROE X (1-Div Payout ratio)

Question 2

What does the sustainable growth rate mean?

Answer 2

It is the rate a company can grow without having to use leverage or debt to fund its growth.

It could cut its dividend and that would allow it to grow faster.

Question 3

What happens when a company does not produce enough cash to internally fund its growth?

Answer 3

It has to borrow, sell stock or sell assets.

Question 4

What is internally funded resources?

Answer 4

Ultimately its FCF is internally funded and from it a company can spend it on growth (capex), dividends or buying back shares.

Question 5

Compare businesses funded internally by those not?

Answer 5

Those funded by FCF are regarded as more stable and sustainable than those externally funded.

Question 6

When was the 100 Bagger study conducted?

Answer 6

1965 to 2014.

Question 7

How is the 100 Bagger calculation done?

Answer 7

market cap of $50m or larger and dividends are reinvested.

Question 8

Using Boeing as an example, highlight why with the best stocks you are simply better to just hold on.

Answer 8

Boeing which has it’s gone from $9 per share in 1990 to $400 to share today.

All the reasons to sell it including inflation, war, interest rate worries, economic fears. Reasons to sell is always long.

However if you pick the quality stock then you’re better off just holding on.

Question 9

Giver examples of how even the biggest bagger stocks had to undergo huge price corrections?

Answer 9

Apple was a 225 bagger from its IPO on 1998 and had 2 peak to trough losses of 80%.

Netflix was a 60 bagger since 2002 and lost 25% of its value 4 times.

Question 10

What time frame did most of the 100 baggers take?

Answer 10

36% 15 yrs or shorter, 20% 16-20 yrs, 25% 21-25 yrs, 16% up to 30 yrs.

Question 11

What are the twin drivers of 100 baggers

Answer 11

Earnings growth and multiple expansion.

Question 12

Give examples of why earnings can be deceptive with 100 baggers?

Answer 12

Intangible growth producing initiatives such as R&D (AMZN), promotion / advertising and employee education are expenses not investments, even though the benefits will last for several accounting periods.

Comcast spent heavily on building out its cable network. You needed to look further out to see the value of a subscriber.

Question 13

What does the 100 bagger study show about forward earnings?

Even if earnings are being distorted, what else can you look at?

Answer 13

Sometimes need to look through nosebleed front year valuation to look a further two years out. AMZN 2003 was trading on 33x EV/ebit. But adding back R and D expense and looking to 2005 it was trading closer to `10x EV/EBIT.

What is clear with the faster growers where earnings might be distorted is you can see the sales growth and the subscriber growth.

You also need to understand the the delta of differential growth - a 20% grower selling at 20x vs 10% growth on 10x earnings. 20 grower after 10 yrs compounds its earnings 6x versus 2.5x for the 10% grower.

Question 14

What did the 100 bagger study say about gross margins?

Answer 14

Almost all of the 100 baggers had consistently high gross margins, especially relative to their industry. The stronger the gross margin the stronger the sign of a moat or competitive advantage.

Question 15

What did the 100 bagger study say about understanding the future pipeline of growth?

Answer 15

Most important is understanding how much value can be created in future years. How long is the runway? How big is the company compared to it industry? Small companies can grow to 10 times or 20 times and still be small. Even a small company it can become a 100 bagger by dominating A niche.

Need to have runway into National and international markets.

Need to be working on many ways to reach the consumer via new products, JV’s, purchasing exclusive rights.

Question 16

What did the 100 bagger study have to say about focussing on business performance versus stock performance?

Answer 16

Many of the stocks you would never have sold if you had only looked at the business performance and not the stock performance.

Question 17

100 bagger study suggests quality is xxxx and management is xxxxx.

Answer 17

Need high quality biz and mgmt.

Watch our for charismatic mgmt. Best to find mgmt who own stock.

Question 18

100 bagger study showed that you have to have?

Answer 18

Patience. The average time for 100 bagger is 15 -20 years.

Question 19

In the 100 Bagger study, how important was an entrepreneurial founder?

Answer 19

Very important. Bet on those with skin in the game. Owner operators are preferred (Steve Jobs, Sam Walton, Bill Gates, Howard Schultz, Warren Buffett, John Malone at Liberty Media, Carl Icachn).

Shulman and Noyes 2012 looked at the historical stock price performance of companies managed by the world’s billionaires. They found these companies outperform the index by 700 basis points or 7% annually. Ruediger Fahlenbrach (2009) looked at founder-led CEO’s and founded they invest more in research and development than other ceo’s and focused on building shareholder value rather than making value destroying acquisitions.

Question 20

In the 100 Bagger study how important are CEO’s?

Answer 20

Very.

Each understood that capital allocation is this is most important job: value per share is what counts not overall size for growth

Cash flow, not earnings determine value

patience is a virtue with acquisitions, as his occasional boldness.

Question 21

100 bagger companies had a different attitude to buy backs….

Answer 21

They often Buy back huge % of its stock overtime. Its like a slow-moving privatization.

Autonation under the leadership of Eddie Lampert bought back 65% of the shares during his tenure.

A similar example is Lowes corporation. The tisch family over four decades bought back 70% of the outstanding shares.

Question 22

What are 100 baggers size?

Answer 22

68% of multibaggers trading below a 300 million dollar market cap at their low.

many had sales figures less than 170 million dollars at the appropriate time of purchase

Question 23

How they are investing makes a big difference to 100 baggers…

Answer 23

It has to be very clear that the company is investing in a way that will produce future benefits. Example is AMZN had depressed its earnings via huge R&D spend which would pay back down the road.

Question 24

Talk about the level of importance of returns to 100 Baggers

Answer 24

return On Capital is extremely important. If a company can continue to reinvest at high rates of return, growing book value quickly, the stock and earnings compound very quickly giving you that parabolic effect.

Overtime the return of a stock and it’s return on invested capital coincide quite nicely.

One year of poor returns doesn’t kill the story.

Question 25

Talk about diversification and its importance to 100 baggers

Answer 25

100 baggers kept expanding into new segments with new partners.

They often also tied together more products/services that could be offered to consumers. Pepsi into snack , fast food, JV Starbucks, buying Aquafina, tropicana, Comast into cable distribution, programming, broadband, content etc.

Question 26

What about the importance of acquisitions to 100 baggers?

Answer 26

Also important but needed to be value creating and not just about size.

Question 27

What about 100 baggers use of technology?

Answer 27

100 Baggers were great adopters of technology. Gillette made a decision to work on the quality of their blades before they had competition. Either receiving royalties for each product sold (Gillette) which then proves a tough moat to cross for competitors.

Also they used technology well for the development and marketing of their products (gillette was one of the first to use TV for advertising).

Question 28

Talk about competitive advantage for 100 baggers?

Answer 28

They all had competitive advantages that added to their durability and kept competitors at bay, allowing them to sustain high returns for longer.