Hundred Bagger Secrets: High Gross Margins & ROIC
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7 سال پیش
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Screen for hundred baggers:
Screen for hundred baggers: https://www.sixjupiter.com
A hundred bagger is a stock whose market capitalization increases by at least a factor of 100 over a given period of time, so that $1 invested would generate $100 or more in returns when the position was liquidated. In this video we'll explore how to find such stocks.
One of the most comprehensive studies of hundred baggers is the aptly titled book "100 Baggers: Stocks That Return 100-To-1 and How to Find Them" by Christopher W. Mayer https://www.amazon.com/dp/B019978QJQ/...
In the book, Mayer notes that since hundred baggers must be capable of rising for years and years on end, they need the ability to avoid mean reversion. In other words, they must possess the ability to continually outperform and defend themselves from competitors. Mayer argues that companies with such moats -- such sources of defensibility -- may be hard to define based on their business attributes, but quantiatively, they are almost invariably characterized by high gross margins. Specifically, he writes:
"I'd sum up this way: It is great to have a moat, but true moats are rare and not so easy to identify all the time. Therefore, you should look for clear signs of moats in a business -- if it's not clear, you probably are talking yourself into it -- you may also want to find evidence of that moat in a firm's financial statements. Specifically, the higher the gross margin relative to the competitor, the better."
Calculating gross margins is simple: just take gross profit, or profit before overhead expense, and divide it by operating revenue.
In addition to gross margin, hundred baggers tend to have noticeably superior returns on invested capital -- meaning the companies are able to earn great profits on the capital they invest in their business. Charlie Munger, billionaire investor and business partner of Warren Buffett, stated thusly: "Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you're not going to make much different than a six percent return - even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you'll end up with one hell of a result."
We can use the SixJupiter screener to find US companies with outstanding gross margins and return on invested capital. For instance, we can start by filtering for companies with a return on invested capital of at least 13.32%, and a gross margin of at least 81.1%. Such companies would be in the top 25% of exchange traded US companies by both those metrics at the time of this recording in November of 2017. --
In subsequent videos, we'll take a look at other tactics to find hundred baggers. To start your hunt for hundred baggers, subscribe at https://www.sixjupiter.com
A hundred bagger is a stock whose market capitalization increases by at least a factor of 100 over a given period of time, so that $1 invested would generate $100 or more in returns when the position was liquidated. In this video we'll explore how to find such stocks.
One of the most comprehensive studies of hundred baggers is the aptly titled book "100 Baggers: Stocks That Return 100-To-1 and How to Find Them" by Christopher W. Mayer https://www.amazon.com/dp/B019978QJQ/...
In the book, Mayer notes that since hundred baggers must be capable of rising for years and years on end, they need the ability to avoid mean reversion. In other words, they must possess the ability to continually outperform and defend themselves from competitors. Mayer argues that companies with such moats -- such sources of defensibility -- may be hard to define based on their business attributes, but quantiatively, they are almost invariably characterized by high gross margins. Specifically, he writes:
"I'd sum up this way: It is great to have a moat, but true moats are rare and not so easy to identify all the time. Therefore, you should look for clear signs of moats in a business -- if it's not clear, you probably are talking yourself into it -- you may also want to find evidence of that moat in a firm's financial statements. Specifically, the higher the gross margin relative to the competitor, the better."
Calculating gross margins is simple: just take gross profit, or profit before overhead expense, and divide it by operating revenue.
In addition to gross margin, hundred baggers tend to have noticeably superior returns on invested capital -- meaning the companies are able to earn great profits on the capital they invest in their business. Charlie Munger, billionaire investor and business partner of Warren Buffett, stated thusly: "Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you're not going to make much different than a six percent return - even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you'll end up with one hell of a result."
We can use the SixJupiter screener to find US companies with outstanding gross margins and return on invested capital. For instance, we can start by filtering for companies with a return on invested capital of at least 13.32%, and a gross margin of at least 81.1%. Such companies would be in the top 25% of exchange traded US companies by both those metrics at the time of this recording in November of 2017. --
In subsequent videos, we'll take a look at other tactics to find hundred baggers. To start your hunt for hundred baggers, subscribe at https://www.sixjupiter.com
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