Making money is not only a skill, its your choices too, here you will know how to choose 100 bagger stocks for the next 5 years for your great choices. In the world of investment, knowing the skill is
The Origin of “100 Bagger”
The term “100 bagger” originated from Peter Lynch’s book “One Up on Wall Street,” where he used the phrase “10-bagger” to describe stocks that had multiplied in value by ten times. India has seen many 100-baggers over the years, and ICICI Securities recently released a list featuring 33 companies, including PI Industries, KEI Industries, and Bajaj Finance, which have gone on to become 1000-baggers. Remarkably, 100-baggers aren’t limited to individual stocks—indices can also achieve this milestone.
For example, the BSE Sensex, which started in 1979 at a base value of 100 points, became a 100 bagger in February 2006 and is now a 700 bagger. Mutual funds like Franklin India Bluechip, HDFC Tax Saver, and Nippon India Growth Fund have also seen 100x growth, rewarding early investors with multi-bagger returns.
The Concept of a 100 Bagger
Christopher Mayer delves into the concept of 100-baggers in his book, which is based on his study of thousands of companies from 1962 to 2014. Mayer narrowed his list to 365 names that delivered a 100 times return on a 1 dollar investment, including popular names like Walmart, Coca-Cola, Boeing, and IBM, with Berkshire Hathaway topping the list with an 18,000 times return.
Mayer’s findings revealed several key characteristics of these companies:
Diversity:
These companies came from various industries, indicating that 100-baggers aren’t confined to a specific type of business, there should be businesses in various diversity. So that the company can resist any turmoil during any pandemic/economic crisis and revive in long run.
Initial Size:
The companies to choose a 100 bagger, they generally should be small but not tiny when they started. May be with a median market cap of about $500 million.
Time to 100x:
The average time it took for a 100-bagger to emerge was 26 years, resulting in a compound annual growth rate (CAGR) of 19.4%. Most companies reached 100x between their 16th and 30th years of existence.
You can also understand how to choose stocks those who give 20% in one month.
Patience and the Coffee Can Investing Strategy
Achieving a 100-bagger requires patience and a long-term investment horizon. Data from the US shows that the average holding period for stocks, which was 5 years in the 1970s, had dropped to just 10 months by 2022. This impatience among investors reduces the likelihood of achieving 100x returns. One way to address this patience gap is through the Coffee Can Investing strategy, which involves building a portfolio of 15 quality businesses and holding them for 20-30 years. The expectation is that at least 2 or 3 of these businesses will become mega multi-baggers, providing acceptable returns for the entire portfolio.
The Twin Engines of a 100-Bagger
According to Christopher Mayer, two main drivers propel a stock to become a 100-bagger: growth in earnings and a growing price-earnings (PE) multiple.
1. Growth in Earnings
Over the long run, a company’s earnings growth aligns with its stock price movement. For instance, if a business grows its earnings by 10% annually, it would take around 48 years to achieve 100x its earnings and share price. However, if the earnings growth rate is 20%, it can become a 100-bagger in almost half the time, while a 40% growth rate gets it there in just 14 years. Mayer’s advice is straightforward: find companies growing their earnings per share at a fast pace. So, find companies that are growing it’s earnings per share at a fast clip. But having said this, merely growing the EPS is not enough and that’s where the second engine is required.
2. Growing Price-Earnings Multiple
Merely growing earnings isn’t enough; a growing PE multiple is also crucial. The PE ratio indicates how much investors are willing to pay for each dollar of earnings. Companies perceived as more valuable or promising often see their PE multiples increase. For example, Hindustan Unilever Limited (HUL) saw its share price grow by 17% annually over 15 years, partly due to an increase in its PE multiple. HUL’s PE ratio moved from the 25-35 band to the 45-55 range and later to 65-75, reflecting increased investor confidence. Similarly, Reliance Industries Limited experienced a re-rating of its PE multiple after entering the telecommunications sector with Jio, using Bharti Airtel’s PE ratio as an anchor.
Characteristics of Future 100-Baggers
Christopher Mayer outlines six key characteristics essential for identifying future 100-baggers:
Characteristics of Future 100 Baggers
Mayer outlines six key characteristics for identifying future 100 baggers:
1. Small Starting Size: Smaller companies are more likely to achieve significant growth. Investors should look for companies with market caps up to 10,000 crores. Smaller companies have a higher likelihood of achieving significant growth. For example, HDFC Bank would need to become a $14 trillion company to be a 100-bagger, which is improbable. Investors should look for companies with market caps up to 10,000 crores and identify potential winners.
2. Long Growth Runway: Companies with the ability to expand into new products, markets, and services have a better chance of sustained growth. Reliance Industries exemplifies this with its diverse portfolio, including petrochemicals, retail, media, textiles, e-commerce, and telecommunications. Companies with the potential to expand into new products, markets, and services are more likely to sustain growth.
3. Reinvestment of Profits: Companies that reinvest profits at a high return for shareholders can create a compounding effect. Metrics like return on invested capital, return on equity, and return on capital employed help measure this compounding effect. For instance, a company growing at 20% annually will significantly outpace a company growing at 6% over 10 years.
4. Economic Moat: A structural advantage that makes it difficult for competitors to challenge the company. Examples include Coca-Cola’s brand and low-cost provider moats.
5. Consistent Track Record: Companies with a history of consistent performance, high gross profit margins, and steady growth are more likely to continue succeeding. Apple is an example of a company with a strong gross profit margin.
6. Owner-Operator Model: Companies managed by their founders, who are also the largest shareholders, often perform better. Examples include Reliance Industries, Wipro, and HCL.
And another 7th important point is
The Importance of Patience
Mayer emphasizes the importance of patience in achieving 100 baggers. Investors need to hold stocks for 15-25 years and resist the temptation to sell based on short-term market movements. He advises being a “reluctant seller” and only selling if absolutely necessary. The quote “You only have to be right once to make it big” highlights the transformative potential of a 100-bagger investment.
Some examples of 100 bagger stocks for the next 5 years
India is going to market leader in next decades and also the construction sector also accompanying that some other sectors will grow. So, you have to choose some stocks that are small now and have major opportunity to grow 100 bagger.
- 1: UNO MINDA
- 2: IRCON
- 3: L & T
Examples and Final Thoughts
The transcript provides examples to illustrate these points. Hindustan Unilever Limited (HUL) and Reliance Industries Limited demonstrate how growth in earnings and a growing PE multiple can drive significant stock price appreciation. HUL’s share price grew at 17% annually over 15 years due to increased earnings and higher PE multiples. Reliance Industries experienced a re-rating of its PE multiple after entering the telecommunications sector with Jio, resulting in substantial stock price growth.
In summary, achieving a 100-bagger requires patience, long-term thinking, and strategic investing. By focusing on companies with the potential for significant earnings growth and a growing PE multiple, investors can identify future 100-baggers. The Coffee Can Investing strategy, which involves holding a portfolio of quality businesses for 20-30 years, can also increase the likelihood of achieving multi-bagger returns. By understanding and applying these principles, investors can work towards securing at least one 100-bagger investment in their lifetime.
A company’s stock price aligns with its earnings growth over the long term. For instance, a business growing earnings by 20% annually can become a 100 bagger in about half the time compared to a 10% growth rate. Mayer suggests finding companies with fast-growing earnings per share.