How do you identify a 100-bagger?

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In this edition of the Alpha Letter, we cover:

  • Stocks: What makes a 100-bagger?

  • Real Estate: Car wash chain for sale in Colorado Springs

  • Sponsor: Grit Capital Newsletter

Stocks

Ever had a 10-bagger before? An investment that returns 900%, or goes up by 10x, is the gold standard for most investors. One 900% gain can make your portfolio profitable even if you had a dozen bad picks that lost money.

What about a 100-bagger? While 10-baggers are hard to come by, most serious investors will experience a small handful of them in their lifetimes.

A 100-bagger is much more rare. It requires a return of 9,900% - astronomically high over any timeframe.

Returning 9,900% on an investment requires a special combination of timing, conviction, and some luck. You’d have to identify a company while it’s very small - you’re not going to find a future 100-bagger investing in a large cap. 

Based on Friday’s closing prices, there are only four 100-baggers over the last ten years (assuming you had bought exactly 10 years ago).

Tesla is a much-heralded 100-bagger. It’s what we expect a 100-bagger to look like. A startup company with several pre-production products and a massive vision that could alter the world. Investors buying into Tesla ten years ago could see the vision: The world would surely move to electric vehicles and Tesla was the first mover.

The other three names on that list don’t fit the mold of a prototypical 100-bagger. Xpel Technologies sells products that help preserve paint on cars. Celsius Holdings produces energy drinks. Trxade Group Inc is a healthcare IT provider.

I point this out to illustrate that not every 100-bagger is some revolutionary technology that completely changes an industry or the entire world. More often, great investment opportunities are boring businesses run by a management team that can turn nothing into something. 

If you had seen any of those three companies in 2011, you probably would’ve passed. Healthcare IT, boring, is what I likely would have thought. I would have probably taken a look at some of the key ratios and projected their sales and profit growth over the next few years. But very few, if any, would have seen an 11,138% return coming.

I bring up these examples so we can think of a potential framework of finding the next 100-bagger — or at least a company that could potentially outperform the market. Building on that narrative, I’d like to go back to Xpel Technologies.

I owned Xpel Technologies back in 2013, when it was listed on the Toronto Stock Exchange. It was a thinly traded stock that had incredible revenue growth. I bought the stock after I saw this tweet.

The tweet showed that Xpel was growing its revenues +50% for five consecutive years. This growth was done without any shareholder dilution and it even had margin expansion.

I later found out that Sean Marconi was a member of the MicroCapClub, a stock picking club that focuses on trying to find high alpha stocks. After I joined the club, I realized that these guys were all over Xpel back in 2013.

The best performing stock that has ever been profiled in the MicroCapClub was Xpel Technologies back in 2013.

Going back and reading the Xpel Technologies thread on MicroCapClub, there are a few indicators that helped Xpel become one of the best performing stocks ever.

  • Extremely high growth: Xpel was growing its top line at an above 50% rate for years. The majority of this growth was organic.

  • No shareholder dilution: Xpel never diluted its shareholders by raising equity. All of the growth went straight to existing shareholders.

  • Margin Expansion: Xpel wasn’t growing for growth’s sakes. Every incremental dollar of revenue resulted in margin expansion and more profitability. There are thousands of companies who grow but never see any profitability.

  • A niche market where you can dominate: Xpel served an extremely niche market and they dominated it. Film protection for luxury cars.

  • Too small for institutional investors: Xpel traded on the Toronto Venture Exchange, had a share price below $1.00 and had a market cap below $30 million. The company was too tiny for any professional investor to make a meaningful position.

Not every multi-bagger will be the same. But they all have similar characteristics. The trick is finding them before large institutional investors can find them. And the best way to do this is to plow through hundreds of annual reports of obscure companies that no one else is looking at.

The guy who found Xpel Technologies originally did that. He found Xpel when it was trading under $0.10/share after going through hundreds of annual reports on the Toronto Venture Exchange.

But even if you do find the next 100-bagger you need to have conviction to hold. I ended up selling Xpel Technologies after it doubled. I thought I was a genius at the time. But that sell order ended up being my most costly investment decision to date.

Grit Capital Newsletter

Want to learn more about investing and finance?

One of my favorite newsletters is the Grit Capital newsletter. Written by Genevieve Roch-Decter, CFA, a former $100 million portfolio manager.

She specialized in small caps spending nearly a decade investing in those 10x stocks we all love to find! Genevieve's newsletter is sophisticated, funny and easy to read for all levels of investors no matter the experience level.

Did I mention it’s FREE? Check out the Grit Capital newsletter and let me know what you think in the comments. 

Real Estate

You’ve probably been to a self-service car wash; but have you ever thought of owning one?

We found this listing for two self-serve car wash locations in Colorado Springs selling for $3.2 million at a 7% cap rate. One of the locations has four bays and the other has eight.

Car washes are considered a great investment because they are probably the most passive of all real estate investments. These types of car wash facilities rarely have an on-site attendant, so you would just need some part-time maintenance person or some on-call repair service that could fix any issues that may come up.

Residential real estate can be a headache. Dealing with tenants can eat up hours of time each week. And what if your tenants don’t pay?

You won’t have to worry about that with a car wash. Your customers pay before they use your service - though you might have to get used to dealing with quarters and dimes.

If you have capital to invest, you can likely invest in more properties if you buy car washes compared to buying residential real estate since you would hardly need to invest any working capital. 

Alpha Thought