Very interesting and insightful, Thank you. Would be cautious however about extrapolating this into the future considering there was no cost of capital and hardcore liquidity
Indeed, that is a very applicable insight. Multiple expansion opportunities may be much more limited in the future, if the general monetary conditions tighten. Within the next couple of years, there may still be some easing, but on a much longer time horizon it seems unlikely we will see a sustained ZIRP environment.
I'm not familiar with most of the companies, but a lot of the ones listed on the ASX e.g. EOS, APX, CCX, CLV has meteoric rises on the years leading up to 2020 and then meteoric falls in the years after. Makes me wonder about the proportion of companies that have actually justified their multiple and earnings expansion through persistent advantages in the quality of the business vs the investors just being sold a false narrative for a few years. I wonder if there's a productive discussion to be had about how to differentiate between those 2 groups?
My gut instinct is that being successful at finding multibaggers requires extensive research into few companies and the cost of being wrong is higher due to naturally being more concentrated, and is more a result of specific qualities unique to each company rather than the more generalised, more numeric approach in traditional value investing.
Indeed, this is partially down to the relatively short time horizon of the study, as well as the time period chosen, which contained the pandemic shock. It is quite feasible for a stock to go 4.5x over 5 years (or an even shorter period) through a rapid change in sentiment, and consequent multiple expansion - meme stocks being the perfect example. It would be far harder to hit 10x over 10 years, or 40x over 20 years, even though the CAGR is lower.
You raise a very good question though in how to discern the real thing from pretenders - the difference is possibly close to that of the fundamental quality - have you any favorite quality indicators that you'd look out for?
Multibagging is somewhat more like VC investing to the pure Graham-style value investing, which is arguably more akin to the PE-style approach.
For Australian companies, usually if the management is too promotional or if it's too popular on hot copper (Australian Stock Forum) I take it as a bit of a orange/red flag, I think usually the higher quality ones are more often quiet over achievers.
I haven't had a great record yet of finding sustainably growing companies so not sure if I can offer much insight into qualities to look for other than what to avoid. For me it's easier to tell when a company is priced for decline but the fundamentals are indicating stability/a small rise vs telling if a company is priced for growth but there is actually going to be exceptional growth in the future.
I think the 4-5 multibaggers which are exceptional results require exceptional insights, circumstances or individuals. Will be keen to see if you can find more general qualities.
4-5x multibaggers can be a mixed bag, and a bit of a no man's land insofar as concrete criteria are concerned. It's low enough that either the correction or creation of a mispricing can get you most of the way there, so changes in sentiment can play a significant role.
For 100-baggers, a large TAM is almost essential (unless you truly started from the nanocaps), yet even fairly niche companies might be able to become 4-5x multibaggers.
Interesting study and a good summary. For me the two most surprising takeaways are that US is underrepresented compared to Europe, and that multiple expansion was actually a slightly larger factor than earnings growth. Would not have expected those.
Both are indeed somewhat surprising. The relatively heavy weighting for multiple expansion is probably due to the short time horizon. Over two decades or longer, we'd expect earnings growth to dominate.
Very interesting and insightful, Thank you. Would be cautious however about extrapolating this into the future considering there was no cost of capital and hardcore liquidity
Indeed, that is a very applicable insight. Multiple expansion opportunities may be much more limited in the future, if the general monetary conditions tighten. Within the next couple of years, there may still be some easing, but on a much longer time horizon it seems unlikely we will see a sustained ZIRP environment.
Amazing study, thank you for sharing!
Thank you for your kind words Philip.
I'm not familiar with most of the companies, but a lot of the ones listed on the ASX e.g. EOS, APX, CCX, CLV has meteoric rises on the years leading up to 2020 and then meteoric falls in the years after. Makes me wonder about the proportion of companies that have actually justified their multiple and earnings expansion through persistent advantages in the quality of the business vs the investors just being sold a false narrative for a few years. I wonder if there's a productive discussion to be had about how to differentiate between those 2 groups?
My gut instinct is that being successful at finding multibaggers requires extensive research into few companies and the cost of being wrong is higher due to naturally being more concentrated, and is more a result of specific qualities unique to each company rather than the more generalised, more numeric approach in traditional value investing.
Indeed, this is partially down to the relatively short time horizon of the study, as well as the time period chosen, which contained the pandemic shock. It is quite feasible for a stock to go 4.5x over 5 years (or an even shorter period) through a rapid change in sentiment, and consequent multiple expansion - meme stocks being the perfect example. It would be far harder to hit 10x over 10 years, or 40x over 20 years, even though the CAGR is lower.
You raise a very good question though in how to discern the real thing from pretenders - the difference is possibly close to that of the fundamental quality - have you any favorite quality indicators that you'd look out for?
Multibagging is somewhat more like VC investing to the pure Graham-style value investing, which is arguably more akin to the PE-style approach.
For Australian companies, usually if the management is too promotional or if it's too popular on hot copper (Australian Stock Forum) I take it as a bit of a orange/red flag, I think usually the higher quality ones are more often quiet over achievers.
I haven't had a great record yet of finding sustainably growing companies so not sure if I can offer much insight into qualities to look for other than what to avoid. For me it's easier to tell when a company is priced for decline but the fundamentals are indicating stability/a small rise vs telling if a company is priced for growth but there is actually going to be exceptional growth in the future.
I think the 4-5 multibaggers which are exceptional results require exceptional insights, circumstances or individuals. Will be keen to see if you can find more general qualities.
Agreed; overselling is certainly not a good sign.
4-5x multibaggers can be a mixed bag, and a bit of a no man's land insofar as concrete criteria are concerned. It's low enough that either the correction or creation of a mispricing can get you most of the way there, so changes in sentiment can play a significant role.
For 100-baggers, a large TAM is almost essential (unless you truly started from the nanocaps), yet even fairly niche companies might be able to become 4-5x multibaggers.
Looking forward to where you will take this in future posts though.
Interesting study and a good summary. For me the two most surprising takeaways are that US is underrepresented compared to Europe, and that multiple expansion was actually a slightly larger factor than earnings growth. Would not have expected those.
Both are indeed somewhat surprising. The relatively heavy weighting for multiple expansion is probably due to the short time horizon. Over two decades or longer, we'd expect earnings growth to dominate.