I usually don't really like Philippe Leblanc. The guy often writes articles without saying anything substantial. And he sometimes preach a little too much for me.
But yesterday, he wrote a great article which should interest every serious investor. The name of the article is "Six 100 baggers québécois" which you probably can translate without my help. The article is interesting but a little misleading because his picks are not all 100 baggers. But anyway, let's see the list:
CGI Group: 492 baggers over the last 27 years
Alimentation Couche-Tard: 400 baggers over the last 27 years
MTY Food Group: 282 baggers over the last 20 years
Metro: 154 baggers over the last 27 years
Industries Lassonde: 47 baggers over the last 27 years
Richelieu Hardware: 41 baggers over the last 24 years
He finishes the article with 2 elements shared by these multiple baggers:
1- A lot of insider ownership;
2- Companies in boring and traditional fields.
I'd add the following elements in regard of the 6 stocks above:
3- A stock which is not a small cap (too risky), nor a large cap (too big to grow in a substantial way). Ok, if you bought them 27 years ago, they were surely small caps, but I believe we should always wait for at least 5 years of track record before investing in a company;
4- A stock in an industry without regulation (I've never written as much about regulation as in this month).
When I think of these elements and I take a look at my portfolio, I see that my healthcare stocks (Gilead, United Therapeutics, Novo Nordisk and Biogen) have two "negative" elements: they are large caps (well, UTHR is a mid cap) and they operate in a sector where innovation is crucial and where there is or there could be important regulation.
Looking at boring stocks, Home Depot is a great, great, great stock in a boring sector, but with a market cap of 170 billion dollars, you probably won't get a multiple bagger there (maybe a 2,3,4 or 5 baggers in the next 10 years, but surely not a 100 baggers).
In the other hand, there's stocks like LKQ, Constellation Software, Stella Jones, Knight Therapeutics,
Winmark, Tucows, Bank of the Ozarks which are not that big. They don't all have a giga ROE, but they have appetite for growth.
Another thing to change in my method: Looking for multiple baggers and not only for stocks with a great balance sheet and great ratios.
Pharma? How do you value the pipeline of drug companies?]
RépondreSupprimerWB: Unlike many businesses, when we invest in pharma, we don’t know the answer on the pipeline, and it’ll be a different pipeline 5 years from now anyway. We don’t know whether Pfizer or Merck, etc, have a better chance, or which of those will come out with a blockbuster. But we do feel we have a group of companies bought at a fair price that, overall, will do well and should offer chances for decent profits. These companies are doing very important things. I could not tell you the potential in the pipeline. A group approach makes sense. It is not the way we would go at banks. If you buy pharma at a reasonable multiple, you will probably do okay 5-10 years from now.
CM: You now have a monopoly on our joint knowledge of pharmacology.
WB: He gets cranky at the end of the day. [laughter]
Source: BRK Annual Meeting 2008 Boodell Notes
URL:
Time: 2008
I agree with the approach. As a group, it's probably not a bad investment.
SupprimerMy investment portfolio is made up of almost entirely of small to mid cap Canadian names. I do not like the big cap stocks at all, as I find they are all over owned by the big investing houses whose sole mandate seems to be to increase assets under management.
RépondreSupprimerI often hear that small cap stocks are risky but I have found in my time that the risk can be mitigated. One can improve his odds of investing in this area of the market by focusing on the balance sheet and the cash flow statement. Insider ownership is a must and even better if the CEO is the founder of the company.
Small cap tech stocks often attract the attention of short term momentum traders who all pile in at once driving the price of the stock up and then after the first earnings miss, they all pile out. The street is short term orientated focusing on earnings per share which can be based on a lot of estimates and assumptions in the income statement. So the big thing that matters in the market is next quarter’s earnings. Good managers of companies don’t concern themselves with short term performance even though the market will often punish them for it by selling off their stock, this often creates a good buying opportunity. Promising small cap companies often invest for the future (research and development, advertising etc) while their earnings per share suffer. To me this is one of the biggest inefficiencies you can find in the market. It is however tough to hang on sometimes in the short term while everyone else is selling out your stock.
Sorry I didn’t mean to make this post so long winded but the small cap sector is a passion of mine.
It depends on your definition of a small cap and the sector in which the small cap is. For instance, there's Cipher Pharma, Rifco, PHM that all looked very promising 2 or 3 years ago. After a few quarters of very good growth, everything fell apart.
SupprimerSo, I believe that a small cap under a certain level (maybe 200 or 300 million dollars) is very risky.