Where Is The Best Place To Look For Multi-baggers?

29th Nov '23 by Mark Simpson

13 comments 4175 reads

In last week's article, I looked at what investors could learn from the full list of multi-baggers from Ed's recent study. The evidence was clear: if investors had to pick one factor to look to find future multi-baggers, it would be the potential for rapid sales growth. Although operational leverage also aided strong returns, very few companies multi-bagged without seeing rapid sales growth. Here is the correlation I showed last week:

From this, it appears that investors seeking exceptional returns should simply screen for the fastest-growing companies in the market and invest in those. However, for this strategy to work, rapid historical growth rates would need to continue into the future. The big question is, how likely is this to happen?

Is revenue growth persistent?

The persistence of growth was analysed in a 2001 paper by Chan et al. called The Level and Persistence of Growth Rates. The authors concluded:

While some firms have grown at high rates historically, they are relatively rare instances. There is no persistence in long-term earnings growth beyond chance.

It doesn't look good, but the data used in the study ended in 1997, which was a long time ago. Many aspects of financial markets have seen significant shifts over the last two decades. Perhaps the rise of global tech and biotech firms means that rapid growth is more likely to continue in today’s markets?

Thankfully, Hedge fund Verdad Capital has updated these findings using data from 1997-2021. Their methodology involved looking at which proportion of stocks with growth rates above the median remained above the median over subsequent periods. They compared the results to what you'd expect from pure chance, for example by flipping a coin, to see if growth would be higher or lower than the median. Here are the results for US stocks:

So, it seems that after one year, growth rates are effectively determined by chance. Over the long term, there appears to be some persistence of growth. For example, 5.9% of companies with sales growth rates above the median had sales growth rates above the median five years later. If this were purely determined by randomness, it would be expected that just 3.1% of them would. However, given that there appears to be no persistence above chance over…

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Neil81

29th Nov '23

This sounds like a very thoughtful and perceptive article. I had been thinking that there was little point in buying into those companies which had already done it.

Not sure about eliminating alternative energy which is not extractive. The first people to harness tidal power successfully are certain to be multi-baggers if they can also run a business

kstrong

A very interesting article - many thanks Mark. If identifying companies with the potential to grow sales significantly over 5-10 years is the key to multi-bagger returns and high historic growth levels is not particularly helpful, it raises the key question of - how do you identify those companies with the potential for prolonged future sales growth? I suspect the answer to this question is through some form of qualitative analysis rather than screening but I haven't yet found a good framework for evaluating this. Hence, I'd be interested in your thoughts, perhaps in a future article, as to how you evaluate if a company has a good 'runway' ahead of it.

Pennyledges

Useful article ….I have had just a few multibaggers (Maoist of which came back down to earth with a a bang) but they were picked up from ideas and comments from subscribers rather than digging through endless lists.
Would it be possible to have a ‘ Subscriber’s Potential Rocket Launch List’…….where great ideas are put out there (NOT TO RAMP) so that we can all do our own checks and research and maybe have a dabble if inspired……That’s how I got into EEE at 2.5p not that long ago….Without a comment from someone I wouldn’t have even heard of the company

Most of which…..I have no idea when Maoist came from

littledavesab

Another good article Mark. re the hedge fund you link to - I see they have a number of interesting articles - these jump out at me

https://verdadcap.com/archive/... A Rule of Thumb for Terminal Valuation Multiples - this is along the lines of cruel realities of investing is that growth does not persist - very relevant to the points you & Ed raise

plus

https://verdadcap.com/archive/... - The Death of Small Cap Equities? - snippet - Trend: US declining quality with EU/Japan increasing but IT being an exception driven by mega cap tech's.

peter100hr

30th Nov '23

Watching the multi-baggers study, reminded me of "The Perfect Stock" article that Ed wrote earlier in the year. The conclusion to that article was that whilst it may be next to impossible to identify the perfect stock, a portfolio of slightly imperfect stocks would, in combination, meet the "perfect" criteria. Wondering where I might find such a potential ten-bagger portfolio, I decided to check the US Nasdaq index, in the form of the ETF QQQ.

Over the period of Ed's multi-baggers study (20.4.13 to 19.4.23), and corrected for currency changes, QQQ delivered a 5.73x return (in £UK). Not bad, if not quite a ten bagger.

So then I thought, how far back one would one have to go from now (it was actually on the 22.11.23 when I checked this), to achieve a QQQ ten bagger? It turns out to be a little over 12 years (22.8.11 to 22.11.23).

Will the Nasdaq/QQQ go on to achieve another ten-bagger in the future? Who knows, but on the basis that it comprises a portfolio of only slightly imperfect stocks, for my money I reckon it makes a good bet.

MatthewBrazier

3rd Dec '23

Thanks Mark, really interesting article. I'd be more convinced by the argument if instead of measuring the proportion of stocks exceeding median growth rates over a run of years, the data looked at persistence on a CAGR basis since this is what counts. Falling below median in a given year doesn't really matter barring a blow up and strikes me as highly likely given the economic cycle.

Conversely, is it true that Ed's list of multibaggers all recorded high percentile growth rates in each of the preceding 3/5 years (or whatever period the study looked at to define historical growth stocks)?

Mark Simpson

Hi Matthew,

That’s certainly a fair critique of the Chan/Verdad research. I think that the multi baggers tended to have strong revenue growth prior to the study period is an interesting counterpoint, but one that isn’t conclusive evidence. After all, there could well be many others with fast revenue growth 2010-2013 that proved to be slow growers 2013-2023.

The other factor could be that almost all companies that survived the GFC would show rapid revenue growth as they recovered from it. So to answer the question we really need to test the future revenue and PAT growth rates of say the top 10% of revenue growth at the start of each year over the next 5 years. Certainly a good research project if I can get the data.

Mark

Hi Mark,

Yes, not only would almost all companies show rapid growth in the GFC recovery but I would guess that the most cyclical companies would show the greatest growth, potentially pushing compounders (which have superior longterm growth rates) below the median for one or two years. Similarly, such cyclical stocks would then populate the baseline set of fast growers over which subsequent performance is measured further distorting the results. I'm not sure if this is the same as what you are saying so apologies if so.

Also, regarding Ed's multi baggers I did not mean to say that they were strong growers prior to 2013 and therefore supported the argument for persistence and agree that cherry picking would be an issue with such a line of reasoning.

I meant that even though they demonstrated high CAGR from 2013 to 2023, is it possible that they would have failed to achieve above median growth in each and every one of the 3 or 5 years prior to 2023? I believe that in the original study, the set of fast growing stocks was defined as exceeding median growth in each year of a 3 or 5 year period rather than in just the preceding year although I could have that wrong. In other words, is it even the case that Ed's multi baggers fall within the group over which subsequent performance was measured in the original study?

Finally, in my view it would not be sufficient to look at the top 10% performers over a one year look back period to find out if growth persists because a year is too short. My intuition says that at least a five year look back would be better since it should somewhat smooth out cyclical effects described above. For example, Shiller's CAPE ratio looks back 10 years for this reason.

I am no statistician so apologies if this is somewhat confused. I know what I'm trying to say but not quite sure how to communicate it precisely.

Matt

alexdonnelly

15th Dec '23

Mark do you still own #LIO

Yes. Not sure it's a long-term multi-bagger, but it looks too cheap. I'm a big believer in mean-reversion, so I expect fund flows and performance fees to recover rapidly when UK small caps do.

Logical David

16th Dec '23

Hi Alex,

I own Liontrust Asset Management (LON:LIO) . If you look at the charts it is starting to form a base. There hasn't been much share dilution over the past few years, so as Mark has correctly pointed out once funds start to flow back into LIO then I too believe the shares will climb back up to their previous 2400p - 2500p level. This would make it a 4 bagger. In the time being I'm just collecting the double digit dividend whilst I wait for recovery which I reckon will start in earnest in 2024 once interest rates start to fall in a few months time.

Where is the best place to look for multi-baggers?

Is revenue growth persistent?

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Mark Simpson

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