2 years ago



32 100-BAGGERS He looked

32 100-BAGGERS He looked at 19 such 100-baggers. He drew four conclusions, which I excerpt below: • The most powerful stock moves tended to be during extended periods of growing earnings accompanied by an expansion of the P/E ratio. • These periods of P/E expansion often seem to coincide with periods of accelerating earnings growth. • Some of the most attractive opportunities occur in beaten-down, forgotten stocks, which perhaps after years of losses are returning to profitability. • During such periods of rapid share price appreciation, stock prices can reach lofty P/E ratios. This shouldn’t necessarily deter one from continuing to hold the stock. Hansen Natural (now Monster Beverage) is a classic illustration of these points. Tony showed how earnings growth rates went from negative in 2001 to 0 percent in 2002. From there, earnings increased on a quarterly basis by 20 percent, 40 percent and then 100 percent. In 2004, quarterly earnings growth accelerated to 120 percent, and then 150 percent, 170 percent and finally 220 percent by the fourth quarter. Meanwhile, the price–earnings ratio also ramped up. In 2001, earnings were just 4 cents per share and the stock had a P/E of 10. By 2006, earnings were about $1 per share and the P/E was 50. Think about that. Earnings went up 25-fold, but thanks to the market putting a bigger multiple on those earnings, the stock went up 125-fold. (We’ll look at Monster Beverage in more detail in the next chapter.) Growth, growth and more growth are what power these big movers. There was a good case study of a 100-bagger recently posted on the Microcap Club’s website by Chip Maloney. This is worth spending a little time on and illustrates Tony’s principles. Maloney reviewed MTY Foods, which is a Canadian franchisor of quick-service restaurants such as Thai Express, Extreme Pita and TCBY.

4 STUDIES OF 100-BAGGERS 33 In 2003, MTY Foods had a $5 million market cap. Every dollar invested in MTY Foods then was worth $100 by 2013. The question Maloney asks is the question I’ve asked myself many times in writing this book. Essentially, how did this 100-bagger become a 100-bagger? In this case, the story begins with Stanley Ma, who became president of the company in 2003. MTY had a fast-food franchising business. And Ma “was the entrepreneur who started the company’s very first restaurant concept Tiki Ming—Chinese Cuisine in 1987 as a recent immigrant to Canada.” What’s most remarkable about this is Ma bought 20 percent of the company when he became president. Altogether, he owned 29 percent of the firm. As an owner-operator, he had every incentive to make the stock work. Maloney goes through a number of reasons why MTY was successful. It starts with Ma. But it was a remarkable opportunity on many other levels as well. Here are a few attributes I’ve chosen from Maloney’s more extensive list: • Stock traded for two times forward earnings (cheap!). • Business was a cash cow with 70 percent gross margins. • Long runway—MTY was just a tiny fraction of the fast-food industry. Ma created new restaurant concepts (5, all told) and bought others (19, eventually). The names and details are not important. What’s important is that these new and acquired concepts allowed MTY to increase its number of locations. These businesses generated high profits. So, taking those profits and reinvesting them created a flywheel of rapidly growing revenues and earnings. You can see this clearly in the table on the next page, “MTY’s path to coveted 100-bagger status.” Maloney makes an interesting observation here: Earnings per share grew by a factor of 12.4x. But if the company only grew earnings by 12.4x, how did the stock grow 100x? The answer lies in the price to earnings (P/E) multiple expansion. Investors in MTY went from paying roughly 3.5x earnings when it was left for dead in 2003 to a more optimistic 26x earnings in 2013.

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