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If you like investing in utility stocks, with their limited upsides, then this book

isnt for you


A fellow named Tony at TS Analysis published one informal 15-page study called An
Analysis of 100-Baggers.
Motilal Oswal 100x
To make money in stocks you must have the vision to see them, the
courage to buy them and the patience to hold them.( patience is the rarest of
the three)
Security analysis Graham
Come back to chapter 5 because in chapter 6 , Keys are providied for baggers
and would like to understand that more before understanding the examples

Lets look at Thorndikes book, which is an important study of how great


CEOs create value
1. Every human problem is an investment opportunity if you can anticipate the
solution
2. Relying only on published growth trends, profit margins and price-earnings ratios
is not as important as understanding how a company could create value in the
years ahead.
3. One needs to stick to the original theme and if it is intact just hold on.
4. Dont more people hold on? Phelps wrote that investors have been conditioned to
measure stockprice
performance based on quarterly or annual earnings but not on business performance
The average asset life of companies in the US is shortening. Shorter asset lives suggest
shorter time horizons over which managers should invest, a reasonable reflection of the
business world. Executives of many technology companies, for example, cant plan for
decades in the way a utility company can because the rate of change is simply too fast.
However , 35 years is probably too long a horizon to plan over. This creates some
tension with the 100-bagger idea. There is a tension between holding on and the
potentially destructive effect of time. Nothing lasts forever
5. With a coffee can, you are allowing yourself to potentially lose everything on a
single position. But
the idea is that the returns on the overall coffee-can portfolio more than make up for
any such disasters. I dont recommend taking on start-up risks in your coffee can. I
would stick with more established companies with long runways of growth ahead and
the ability to keep compounding capital at a high rate.
6. Few conslusions:
a. The most powerful stock moves tended to be during extended periods of growing
earnings accompanied by an expansion of the P/E ratio.
b. These periods of P/E expansion often seem to coincide with periods of
accelerating earnings growth
c. Some of the most attractive opportunities occur in beaten-down,forgotten stocks,
which perhaps after
d. Years of losses are returning to profitability During such periods of rapid share
price appreciation, stock prices can reach lofty P/E ratios. This shouldnt
necessarily deter one from continuing to hold the stock
7. Growth, growth and more growth are what power these big movers
Case Studies : MTY Foods

1.
2.
3.
4.
5.

When MA joined president , he took stake of 20%


Stock traded for two times forward earnings
Business was a cash cow with 70 percent gross margins
MTY was just a tiny fraction of the fast-food industry
Created 5 rest. and bought othres . So, taking those profits and reinvesting them
created a flywheel of rapidly growing revenues and earnings
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.
So, again, you need huge growth in earnings. But the combination
of rising earnings and a higher multiple on those earnings is really what
drives explosive returns over the long-term
I call these two factorsgrowth in earnings and a higher multiple on those
earningsthe twin engines of 100-baggers.
Ideally, you need it in both the size of the business and in the multiple the market puts
on the stock,
its easy to agree with Oswal when he wrote the single most important factor is
GROWTH in all its dimensionssales, margin and valuation.

SQGLP
SSize is small.
QQuality is high for both business and management.
GGrowth in earnings is high.
LLongevity in both Q and G
PPrice is favorable for good returns.
**Investing with top entrepreneurs and owner-operators gives you a big edge
A low entry price relative to the companys long-term profit potential is critical.
AutoZone: It was a 24-bagger in Martellis study despite registering ho-hum growth
rates of 25 percent. Yet AutoZone bought back huge sums of stock, which powered
earnings-per-share growth of 25 percent a year

Page 46 : Some security analysis points


There is no amount of security analysis that is going to tell you a stock can be a 100bagger. It takes
vision and imagination and a forward-looking view into what a business can achieve and
how big it can get.
What security analysis can do is weed out the dudsthose companies that dont create
value even though they show great growth in earnings

Ill add that the median sales figure for the 365 names at the start was about $170
million and the median market cap was about $500 million.
But $170 million in sales is a substantial business in any era.Its not a tiny 50-cent stock
with no revenues or barely any revenues. Secondly, these figures imply a median priceto-sales ratio of nearly
three, which isnt classically cheap by any measure. Going through these 100-baggers,
youll find stocks that looked cheap, but more often you find stocks that did not seem
cheap based on past results alone.So you must look forward to find 100-baggers.
**To think about the size of a company now versus what it could be. This doesnt mean
you have to have a
huge market to address, although that helps. Even a small company can become a 100bagger by dominating a niche
** Despite occasional exceptions, you do want to focus on companies that have national
or international markets.Far much BETTER options can be found than Niche
Twin engines : In 1982, Aflac had just $585 million in sales. By 2002, by which time it
was a 100-bagger, Aflac had sales of $10.2 billion. Aflacs price-to-sales ratio, by the
way, went from about 1.7 to 5.4.
If you have a brand that catches on, grows, and hits scale, the costs start to slowly
unwind
a. Net sales grew to a larger percentage of gross sales. That reflects promotions
(discounts) Monster no longer needed to offer, as Monster was now a well-known
brand retailers wanted to carry.
b. Gross profits as a percentage of net sales also increased as their copackers and
distribution partners started to see them as a good customer and offer
concessions to stay.
Queries:
Gross Sales
Net Sales (Sales allowances, Sales discounts & Sales returns)
Gross profit
Operating Income OR EBIT (Core,Recurring business profitability , before the impact of
capital structure and taxes) represents funds that could go to everyone like Equity
investors,Debt investors and Govt .It includes both normal expenses and capital
expenditures because full D&A expense is embedded within COGS or Opex which
subsract to get an operating income.SOMETIMES EBIT is closer to free cash flow
(cashflow from operations-capex) because both include the impact of CAPEX .

EBITDA : Operating Income + D&A (Sometimes with other adjustments as well). Generally
EBITDA is closer to Cashflow from operations than EBIT. Cashflow from operations
include interest,working capital and taxes . EBITDA calculation is faster than full CFO
number.These profits also goes to everyone. EBITDA is much better for CAPEX less

importance like software etc..


https://www.youtube.com/watch?v=VkW0yBlsJ3s
https://www.youtube.com/watch?
v=5QU8AwvsW8U&list=PL5hdd9oiuWS9CGfBVVfXFuawltarkrjI2&index=3

Net profit (Gross profit Business Expenses).It also includes Other non core business
(Ex:98% core business and 2% smalll business).It is available only to Equity
investors.not close to CFO OR FCF OR OTHER CASH FLOW BASED METRICES. Not an
effective way to look at it because it is distorted by capital structures , tax rates and so
on
Share Holder Equity
Enterpsie value Dont change when u raise debt or purchase shares or issue shares .
However market can react which changes the share price and it may impact the EV.
Equity value and Equity value based multiples are so important and it change
EV/EBIT = 33, an extremely steep multiple
value of a business is the sum of its future free cash flows, discounted back to the
present. And he understands capital allocation and the importance of return on invested
capital.(Warren Buffet) (ateris critical to
100-baggerdom)
Market leadership can translate directly to higher revenue, higher profitability greater
capital velocity and correspondingly stronger returns on invested capital. (Bezo) Our
decisions have consistently reflected this focus.Its FUTURE INVESTMENT (R&D) . Whats
the mix between growth and maintenance R&D.
The biggest point to convey, Thompson wraps up, is that return on capital is
extremely important. If a company can continue to reinvest at high rates of return, the
stock (and earnings) compound . . . getting you
that parabolic effect. Its a point we will return to again and again.
The return of a stock and its ROE tend to coincide quite nicely Smaller,high-ROE
businesses where the growth is relatively straightforward. ROE alone does not suffice. If
in an off year ROE is 10 percent, and in a good
year its 30 percent, then that counts as a 20 percent average. But he has no interest in
companies that lose money in a down cycle. Jason is reluctant to buy a high-ROE
company where the top line isnt
at least 10 percent. But when he finds a good one, he bets big. If the ROE doesnt fall
below 20%, generally,
I dont sell, Jason answered, unless the valuation gets stupid To sum up: Its important
to have a company that can reinvest its profits at a high rate (20 percent or better). ROE
is a good starting point and
decent proxy. I wouldnt be a slave to it or any number, but the concept is important.
The second piece requires some feel and judgment. It is the capital allocation skills of
the management team.
If management and the board have no meaningful stake in the companyat least 10 to 20% of the
stockthrow away the proxy and look elsewhere

Steve Jobs at Apple. Sam Walton at Walmart. Bill Gates at Microsoft. Howard Schultz
at Starbucks. Warren Buffett at Berkshire Hathaway. The list goes on and on. These
guys are all billionaires

Invest with great CEO. The main idea is that these CEOs were all great capital
allocators, or great investors. CEOs have five basic options, says Thorndike: invest
in existing operations, acquire other businesses, pay dividends, pay down debt or
buy back stock. (I suppose a sixth option is just sitting on the cash, but that only
defers the decision of what to do with it.)
a.
b.
c.
d.
e.
f.
g.

capital allocation is the CEOs most important job


value per share is what counts, not overall size or growth;
cash flow, not earnings, determines value
decentralized organizations release entrepreneurial energies
independent thinking is essential to long-term success
sometimes the best opportunity is holding your own stock
patience is a virtue with acquisitions, as is occasional boldness

Murphys formula was simplicity itself: Focus on cash flow. Use leverage to acquire
more properties. Improve operations. Pay down debt. And repeat.
About Berkshire that most people overlook - The amount of leverage in Berkshires
capital structure amounted to 37.5% of total capital on average, Chirkova writes.
That would surprise most people
This leverage came from insurance float. Buffett owned, and still owns, insurance
companies. Its a big part of Berkshires business. As an insurer, you collect
premiums upfront and pay claims later. In the interim, you get to invest that money.
Any gains you make are yours to keep. And if your premiums exceed the claims you
pay, you keep that too. Berkshires cost of borrowing at an average of 2.2 percent
about three points lower than the yield on Treasury bills over the same period. This
is the key to Berkshires success. Its hard not to do well when nearly 40 percent of
your capital is almost free.
So, summing up here, there are three key points:
1. Buffett used other peoples money to get rich.
2. He borrowed that money often at negative rates and, on average, paid rates well
below what the US Treasury paid.
3. To pay those low rates required the willingness to step away from the market
when the risk and reward got out of whack.
Buy backs : It actually has to reduce outstanding shares else it meaning less. There
is only one combination of facts that makes it advisable for a company to
repurchase its shares: First, the company has available fundscash plus sensible
borrowing capacitybeyond the near-term needs of the business and, second, finds
its stock selling in the market below its intrinsic value, conservatively calculated