By Remy Blaire
The great debate over stock market valuation continues as equity averages grind higher. Focus will soon shift to Q2 earnings season and with it comes elevated expectations for extended earnings growth and higher revenues. At a time when growth strategies receive more positive attention than value strategies, the reality that markets are cyclical may seem to get pushed to the sidelines. Most investment strategies should be evaluated on a regular basis despite historical performance measures.
In 2015, Christopher Mayer wrote “100 Baggers: Stocks That Return 100-to-1 and How to Find Them.” The value investor’s book focused on his investigative research into the stocks that returned 100-to-1. Mayer was inspired by the work of Thomas Phelps from 1972, “100 to 1 in the Stock Market.” While Phelps analyzed 365 companies that brought in at least $100 for every dollar that was invested during 1932 to 1971, Mayer analyzed 365 stocks that were 100-baggers from 1962 to 2014.
Mayer came to the conclusion that the major stock indexes are indicative of the environment but are not a good predictor of individual stock performance. He says that the opportunities are out there even when lofty markets make it harder to find the so-called 100-baggers. Some of the companies surpassed the 100-to-1 return and offered impressive results — including Berkshire Hathaway (NYSE: BRK.A), Monster Beverage (NASDAQ: MNST), Hormel (NYSE: HRL), Comcast (NASDAQ: CMCSA) and Amazon (NASDAQ: AMZN).
It may seem like a far-fetched quest to find the big winners in the current landscape, but Mayer focuses on a simple, straightforward approach that comes across as common sense: Find early-stage companies, do the research and make sure that the companies uphold good business practices, and learn to hold onto the stocks.
Peter Lynch had his method of identifying the next 10-bagger and focused on companies with sustainable growth rates and a specific P/E ratio. Mayer says the one underlying characteristic of the 100-bagger is high ROE. Smaller companies with potential to scale and expand into wider markets provide another opportunity for strong returns. Even if the return on an investment doesn’t equate to an impressive 100x, it is practical and realistic to spend time researching, testing and evaluating opportunities in any market.
GOLD ZIGS WHEN THE MARKET ZAGS
In the aftermath of the Berkshire Hathaway 2018 Annual Shareholders Meeting, Mayer reflected on the investing lessons that Warren Buffett learned over the years and weighed in on the gold commentary by the legendary investor.
Buffett’s “potshot at gold” posits that while one ounce of gold is still an ounce of gold in twenty years, owning a business through stock means that it can grow and be worth a lot more. Mayer says gold does have its “charm” because an ounce of gold remains a real asset while a stock could decline in value. As a long-term alternative investment, gold should have a place in a portfolio.
Practical investors could benefit from having gold in their portfolios for a reason other than a hedge against inflation. Although past performance is no indicator of future performance, Mayer says an interesting reason to own gold is that “if you own 5% of your portfolio in gold … it dampens the volatility a little and adds a little bit of return.” Many investors would agree with his comment that gold is a way to diversify one’s portfolio.
CRYPTOCURRENCIES: AGE IS JUST A NUMBER
Charles Munger’s comment on cryptocurrencies at the Berkshire Hathaway Shareholder Conference got plenty of media attention. Many may be quick to point out Munger’s age and his long-time bias against the technology sector. While Munger referred to bitcoin as a “turd” and went on to say that it is “worthless, artificial gold” on CNBC, Buffett didn’t mince words when he expressed his disdain for the digital currency saying it is “probably rat poison squared.” Strong opinions from Munger and Buffett on speculation over nonproductive assets are not surprising.
WRINKLES IN THE MARKET
It is not wise to be too confident about the market, but Mayer carefully states the obvious: Prices are stretched and the equity markets are expensive. He is cautious about the passive equity indexes and the mature, levered companies that are trading at high multiples.
When you do the math and take into consideration what it takes to find a 100-bagger, the equation is simple. It would be unlikely for sizable companies such as Coca-Cola, McDonald’s or Apple to grow a hundred fold, as opposed to a small company that can generate substantial profits and reinvests its profits over the course of several decades.
Meanwhile, FAANG stocks are extending their moment in the spotlight. While concerns about monetary tightening fuel concerns about the downside risks, the technology sector continues to push the NASDAQ Composite Index to record highs and push the S&P 500 Index to lofty levels. Mayer says FAANG valuations are stretched and are not sustainable in the long run.
If history is any indicator a cautious perspective is necessary. At the same time an equity market that is expensive doesn’t equate to a lack of opportunities for the 10-bagger or even the 100-bagger stock. Individual stocks are not the broader market and vice versa.
Listen to the interview segment with Chris Mayer and Sprott Media’s Albert Lu: GOLD ZIGS WHEN THE MARKET ZAGS.