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Multi-Bagger Opportunities With Realistic Positive Outcomes


BG2008

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I was inspired by a recent conversation about multi-bagger opportunities, why they happen and what are some potential current opportunities.  I will start by sharing some examples, both past and current

 

Past Examples

Charter - This is a rollup in a good industry mixed with intelligent use of leverage at up to 4.5x EBITDA mixed with sharebuybacks mixed with good execution and a chairman and CEO with great past track record.  There is along thread

Xpel - Small cap, great product, frankly, I don't know much.  But I know the outcome.  I will read the thread.  Small market penetration.  Fast adoption.  Margin expansion. etc

FANG - Just phenomenal businesses growing 20-40% top line, amazing margins, network effect, pricing power etc

Napco - Deleveraging play since 2009.  Frankly, they got into trouble, got over levered and have been deleveraging.  The stock has done phenomenal

Constellation Software - Other know better

Heico - Forbes article https://www.forbes.com/sites/abrambrown/2020/01/13/heico-mendelson/#93d87c74b18c

HVAC Companies - Lennox (5x since housing bubble price) AO Smith (10x since housing bubble price)  These are a bit counter intuitive.  I used to be a HVAC engineer and I used to size the quipment using the manufacturer load calculator software.  To my untrained eye, I didn't realize that that was the manufacturers' way of creating "habits" as an engineer used to specifying Lennox equipment would loath to specific a different manufacturer as they do not understand the pros and cons.  If there were issues, they would know it already. 

SaaS Companies - I missed the boat here, someone smarter can explain

GGP Bankrupted equity back in 2009 - roughly a 100 bagger for Ackman and company

Fannie and Freddie - Levered equity stub

Domino's Pizza - Great Franchisor business, improved pizza quality, invested in technology, etc

HHC - A laggard in the last 5 years, but still a 4 bagger since its spinoff from GGP

Berry Global - Up 3x since IPO in late 2012.  Public LBO of a plastic packaging company.  I own a position here and think that it is very undervalued.  I think intrinsic is much higher in the 70-100 range as they execute on their integration and deleveraging in the next few years

 

Current Opportunities

Calumet - Deleveraging play, specialty chem business does about $200mm of EBITDA and likely worth $1.8bn to $2.0bn at 9-10x EBITDA.  Montana refinery likely worth 4.5-5.0x EBITDA over $500mm.  If sold in next 12 months, company will delever from $1.2bn net debt to $600mm net debt with $100mm of FCF in 2020.  2020 is the first year after the company implement ERP software and have no turnaround activities which means all facilities run at full speed with new catalyst.  In addition, IMO 2020 will benefit company as the WCS/WTI spread is now $20 for the strip.  Their facilities can process the heavy sulfur Canadian crude.  That's my crude understanding, pun intended.  Why does the opportunity exist?  It is a MLP that doesn't pay dividend which means there is not natural shareholder base.  They can't pay for a while because the 2025 debt restrict debt payment until a 3x fixed charge ratio.  This is different than 3x debt to EBITDA.  Debt trades at 5.7% to 7.6% and the equity trades at 28%.  Probably the most mispriced security that I know.  Recent unsecured debt was issued at 11% and then prompted traded up to $112.  They got robbed with the debt.  2 more months, they probably could've gotten it done at 9%.  But such is the life of a levered company in the capital markets with a MLP structure.  I think this is potentially a $20-30 stock in 3-5 years which now trades at $4.50.  I think the current CEO is a huge improvement over his previous family run.  Everything improved, operation, capital allocation, technology, and people. 

Aspen Group - This is a high growing "Peter Lynch" style.  Better product, one of the lowest cost online nursing program, mostly does RN to BSN in the past and have expanded to Pre-licensure to BSN.  Organically growing 40% a year with 60% gross margin.  No EBITDA as they have to pre-hire call center staff who function as academic advisors.  I think incentives are correct.  A little bit too much equity comp and CEO is eccentric.  But it has the potential to be a multi-bagger.  Just raised $13.9mm at $7.15 per share and significantly de-risk the balance sheet.  I wish the CEO has the investor relationship skills of Elon Musk.  I think society needs more of companies like Aspen where you can get a BSN soup to nuts for under $40k.  People don't take on much debt and don't go to "economic jail" for failing out of college.   

Ashtead - One of the better businesses that I have seen.  But very prone to 50% selloffs.  Scale, network effect, 2 bigger players and lots of little guys who can't compete.  I wish I bought more in the past year.  Ashtead does equipment leasiing. btw.

 

Would love to have a very active conversation on this

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Guest cherzeca

appreciate the thread!  but it is a tough one to chew on.

 

to my mind, the best multi bagger opportunity is a great business that has suffered for some reason (political-GSEs, excess leverage-GGP) that is peripheral to its business model, and where one can think that a return to normality will ensure.  this of course leaves out great compounders like the fangs which have a platform far better than most people are willing to give them credit for, and which just execute and grow.

 

the former are more value-oriented, the latter much more expensive and GARP only at the margins.  the former more catalyst driven, the latter more a question of will earnings growth match (exceed) projections.

 

it's a tough game either way, but in my experience, some names just seems to be more understandable/reliable than others (based upon subjective factors), so it is important to trust your instincts if they lead to conviction upon due diligence

 

 

 

 

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Adding color to XPEL, it was a multi bagger from prior, but what really added the gusto to this thing was the 3m lawsuit that took this to $1.

 

Ideas otherwise

 

Likely

 

HTL- growing organically at low-mid teens, uplisting probably adds 20-30% minimum to valuation

 

PCYO- you've got $2B(in todays dollars) in "eventual" asset value, only question being how quickly they got monetized

 

EDIT/CRSP/NTLA- you basically have the entire CRSPR play/theme rolled into 3 companies with maybe $5-6B in market cap. The opportunity is probably 100x that number. Granted, real revenue/profits are maybe 7-10 years away. But by then, if this works, well...

 

 

Probably not but has the potential

 

Northern Dynasty- Pebble Mine probably aint happening

 

 

 

Definitely but you'll never get it

 

Buck Hill Falls - Shares conservatively worth $75, trading at $14. Maybe 1000 shares have traded in the past 5 years...

 

RSRV- the best play on oil that you'll never be able to take a real position on.

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Guest cherzeca

my old classmate is George Church, so I have been following crispr technologies as they become commercialized....but I am on the fear side of the fear/greed seesaw at this point

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appreciate the thread!  but it is a tough one to chew on.

 

to my mind, the best multi bagger opportunity is a great business that has suffered for some reason (political-GSEs, excess leverage-GGP) that is peripheral to its business model, and where one can think that a return to normality will ensure.  this of course leaves out great compounders like the fangs which have a platform far better than most people are willing to give them credit for, and which just execute and grow.

 

the former are more value-oriented, the latter much more expensive and GARP only at the margins.  the former more catalyst driven, the latter more a question of will earnings growth match (exceed) projections.

 

it's a tough game either way, but in my experience, some names just seems to be more understandable/reliable than others (based upon subjective factors), so it is important to trust your instincts if they lead to conviction upon due diligence

 

I beg to differ only in the hope of making myself and other less "boxed in" with being too Graham like which I suffered from early in my career.  I think if you find a decent business trading at 10-12x P/FCF with 4-6% organic EBITDA growth.  It naturally translate to a 12-16% compounding.  If the shares are to continue to trade in that range and the company actually buys back shares, you wind up with a pretty good long term rate that has surprised me quite a bit.  I think if they pay 2% dividend and buy back 8-10% of the S/O coupled with the growth and the market eventually re-rate them to a 20x P/FCF for the nice businesses that it is, the CAGR on owning something like this is actually quite high.  Probably not a 10 bagger in 10 years, but likely a 4x in 10 years.  This is probably one of the most overlooked areas of "value" in the last 10 years for me. 

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Guest cherzeca

I forgot the Bank Stocks in General and TARP Warrants

that goes to my value/catalyst/return to normal theme.  I recall a cnbc interview of Tepper soon after the GFC where he said the banks were screaming buys because (in essence)  return to normal will happen or else we will all be speaking Chinese...

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Obviously Tesla; it's going to $6000 apparently.

 

Gregmal, I'm surprised you didn't throw AYR Strategies out there.

 

Not sure what time frame we're talking about here, but I think CenturyLink is undervalued and may have 5G growth potential.  There was a new rule passed last year that allows companies with an existing attachment on a utility pole to add more attachments without requesting permission from the owning utility.  CenturyLink already owns an extensive fiber network with approved attachments, so they have a valuable asset for 5G if somebody wants easy access to it.  They are also selectively building out fiber to the home, which is tough to beat.  When they work down their debt I think they should trade with a yield similar to a utility.

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EDIT/CRSP/NTLA- you basically have the entire CRSPR play/theme rolled into 3 companies with maybe $5-6B in market cap. The opportunity is probably 100x that number. Granted, real revenue/profits are maybe 7-10 years away. But by then, if this works, well...

 

 

You really caught my attention with this bet on Crispr I'm going to look into it for sure!

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Another recent example where you can see the thesis develop over time is Cambium Learning Group (ABCD). 

 

First VIC writeup in 2010 at $5/share:  https://www.valueinvestorsclub.com/idea/CAMBIUM_LEARNING_GROUP_INC/1068846465  (extensive comment thread through 2014)

Second VIC writeup in January 2015 at $1.90/share:  https://www.valueinvestorsclub.com/idea/CAMBIUM_LEARNING_GROUP_INC/8176075446 (another extensive comment thread)

CoBF thread started August 2017 at ~$5/share:  https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/abcd-cambium-learning-group/msg307030/#msg307030

Taken out by private equity for $14.50/share in October 2018.

 

Part of the opportunity in Cambium, I think, was that the business transition from print to digital took longer than expected.  There seems to have been exhaustion with the thesis down at the 2015 lows, even though the transition was taking place.

 

Another relatively recent example was Hawaiian Airlines following the bankruptcy of its main Hawaiian competitor.  That massively changed the economics of inter-island flying, which one clever analyst foresaw and turned into a ~10-bagger:  https://quinzedix.blogspot.com/2012/07/hawaiian-holdings-air-transport.html

 

As for a potential multi-bagger right now, I see that potential in IDWM, but the actual economics of its TV business are too unknown at this point to model anything.

 

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Obviously Tesla; it's going to $6000 apparently.

 

Gregmal, I'm surprised you didn't throw AYR Strategies out there.

 

Not sure what time frame we're talking about here, but I think CenturyLink is undervalued and may have 5G growth potential.  There was a new rule passed last year that allows companies with an existing attachment on a utility pole to add more attachments without requesting permission from the owning utility.  CenturyLink already owns an extensive fiber network with approved attachments, so they have a valuable asset for 5G if somebody wants easy access to it.  They are also selectively building out fiber to the home, which is tough to beat.  When they work down their debt I think they should trade with a yield similar to a utility.

 

CTL is indeed interesting. It belongs to the group of equity stubs ( where capitalization is mostly debt) that can become multibaggers, if the business performs well, debt is paid back and equity replaces is. The equity can become a multibaggers , even if the overall EV doesn’t change all that much.

 

Examples I am watching are ETM, CTL, CCO, CX, TAST, AMC

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Obviously Tesla; it's going to $6000 apparently.

 

Gregmal, I'm surprised you didn't throw AYR Strategies out there.

 

Not sure what time frame we're talking about here, but I think CenturyLink is undervalued and may have 5G growth potential.  There was a new rule passed last year that allows companies with an existing attachment on a utility pole to add more attachments without requesting permission from the owning utility.  CenturyLink already owns an extensive fiber network with approved attachments, so they have a valuable asset for 5G if somebody wants easy access to it.  They are also selectively building out fiber to the home, which is tough to beat.  When they work down their debt I think they should trade with a yield similar to a utility.

 

AYR I thought of but it's weird. I think its got a pretty high chance of doubling. But multi bagging even over an extended period time is tough because their big edge is currently wholesaling. Which should clean up for a few years but is very much endangered if federally weed gets green-lighted because one of the main reasons you have opportunities AYR is exploiting is because you cant ship state to state or lets say, outsource production to the most efficient areas such as South America. Growing dope at $1100 a lb and selling it at $2900 only works because they cant haul this shit in from Vermont or fly it in from Colorado.

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The difficult part is predicting multi-baggers going forward rather than listing them going backward.  8) But you knew that.  8)

 

My latest/current multibaggers (eyeballed by looking for >200% return): AAPL, SHOP, SPCEWS :P

 

If I had to go with value stock that could go up 3X+, I'd say YY. But hey it's Chinese internet co, so there.

IMO currently market is pricing most growth/steady-compounder companies pretty optimistically. You still might get a multibagger within >10 year timeframe, but likely with not great annual return.

 

There are always opportunities in small/micro/foreign stocks. The difficulty is figuring out which ones are the real ones.  8)

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I will offer up Atento (ATTO.N) as a potential multibagger. I think there are catalysts in the two months that could jump start the process.

 

This is the forum link: https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/atto-atento/msg392712/#msg392712

 

This is a SA article I wrote earlier this month: https://seekingalpha.com/article/4314926-atento-deserves-your-attention

 

I attached the SA article in case access is limited.

Atento_Deserves_Your_Attention_-_SA_-_1.18.20.pdf

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The difficult part is predicting multi-baggers going forward rather than listing them going backward.  8) But you knew that.  8)

 

My latest/current multibaggers (eyeballed by looking for >200% return): AAPL, SHOP, SPCEWS :P

 

If I had to go with value stock that could go up 3X+, I'd say YY. But hey it's Chinese internet co, so there.

IMO currently market is pricing most growth/steady-compounder companies pretty optimistically. You still might get a multibagger within >10 year timeframe, but likely with not great annual return.

 

There are always opportunities in small/micro/foreign stocks. The difficulty is figuring out which ones are the real ones.  8)

 

In the small and micro cap side, Calumet is a $350mm MC with a $1.2bn net debt.  I think the difference is that Calumet is a "Real Company" with $300mm of EBITDA.  It has always had several billion of EV in its corporate history.  Sometimes, the opportunity maybe in hundreds of million market cat that used to be $2bn.  It's about righting the shipping rather than growing into it. 

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In the small and micro cap side, Calumet is a $350mm MC with a $1.2bn net debt.  I think the difference is that Calumet is a "Real Company" with $300mm of EBITDA.  It has always had several billion of EV in its corporate history.  Sometimes, the opportunity maybe in hundreds of million market cat that used to be $2bn.  It's about righting the shipping rather than growing into it.

 

Sorry, I have no input on Calumet.

 

Maybe to generalize, that's not an area/situation where I invest.

 

Good luck.

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Current Opportunities

Calumet - Deleveraging play, specialty chem business does about $200mm of EBITDA and likely worth $1.8bn to $2.0bn at 9-10x EBITDA.  Montana refinery likely worth 4.5-5.0x EBITDA over $500mm.  If sold in next 12 months, company will delever from $1.2bn net debt to $600mm net debt with $100mm of FCF in 2020.  2020 is the first year after the company implement ERP software and have no turnaround activities which means all facilities run at full speed with new catalyst.  In addition, IMO 2020 will benefit company as the WCS/WTI spread is now $20 for the strip.  Their facilities can process the heavy sulfur Canadian crude.  That's my crude understanding, pun intended.  Why does the opportunity exist?  It is a MLP that doesn't pay dividend which means there is not natural shareholder base.  They can't pay for a while because the 2025 debt restrict debt payment until a 3x fixed charge ratio.  This is different than 3x debt to EBITDA.  Debt trades at 5.7% to 7.6% and the equity trades at 28%.  Probably the most mispriced security that I know.  Recent unsecured debt was issued at 11% and then prompted traded up to $112.  They got robbed with the debt.  2 more months, they probably could've gotten it done at 9%.  But such is the life of a levered company in the capital markets with a MLP structure.  I think this is potentially a $20-30 stock in 3-5 years which now trades at $4.50.  I think the current CEO is a huge improvement over his previous family run.  Everything improved, operation, capital allocation, technology, and people. 

 

BG - I, too, like CLMT and would love for it to trade at $20-$30  ;D but will probably start selling around $15. I like the new CEO, love the fact that they currently have pessimistic shareholder base, and lack distribution/dividend. Our math is about the same other than the sale price of Montana refinery which is impacting my valuations.

 

Would love to learn the basis of estimate for $500M sale tag as I think they will be lucky to get $300M with my range being $220 to $375M. My reasoning is that $100M of earnings that comes from fuel segment come from between Shreveport (60k bpd with non-fuel production) and Montana (25k bpd exclusively fuel production). The other two refineries don't make fuels.

 

Shreveport facility capacities are 16k bpd for naptha, 6.5k bpd for asphalt and road oil, 12.5k for lubricants, incidentally making it a 25k bpd fuel refinery. Back of the envelope calculations, crack spread for Montanta is 3x crack spread in Shreveport. So on a good day (WCS will not stay this depressed), I attribute $75M to Montana refinery. At 5x EBIDTA, that's $375M. Couple it with this

https://www.reuters.com/article/us-usa-oil-refiner-sales/u-s-refinery-sales-hit-the-brakes-with-5-of-capacity-on-block-idUSKBN1Z90GN and you probably have to discount the $375M number...a lot.

 

Reference for capacity numbers: http://www.dnr.louisiana.gov/assets/TAD/reports/refinery_survey/RefineryReport_2017.pdf (Tables 14 and 15)

 

Another way to arrive to valuations: Montana is a 25k bpd capacity refinery and is about the same size as San Antonio refinery (21k bpd) which CLMT unloaded for $65M. Montant is 3x more profitable, so $65M*3 = $205M.

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I looked at CLMT a while back and continue to mess with it a little in terms of putting together some positions; although none of any significance in size. But whats attractive IMO, especially if you dont really need this to perform immediately and arent married to seeing the whole thing through....theres a ton of juice on the options. You could sell some $3 puts and then some the $5 calls for August and collect about .90-$1 in premium against a $4.5 stock. Should the stock take off you miss the multi bagger but I dont know too many who would complain about making $1.50 on a $4.50 stock in 7 months.

 

You could do a similar trade selling May $4 puts and May $5 calls against a long position and take in 70c in premium for 4 months...

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Hey all:

 

My entry into the multi-bagger opportunity would be Caledonia Mining (CMCL).

 

They are a gold miner in Zimbabwe.

 

I've talked about them before.

 

There are few key events that are likely to happen in the next 12 months.

 

1). They finally seem to be mining higher grade ore.  There have kinda been two announcements about this.  The first was that they raised the dividend.  If they are raising the dividend, it is likely because they have inside knowledge that they are operating better and making more money.

 

Of course, there is also the announcement that they have hit higher grade ore.  Please see:

 

https://finance.yahoo.com/news/caledonia-mining-corporation-plc-record-070010553.html

 

Processing higher grade ore is a REALLY big deal.  Most of the costs are fixed.  They largely have the same number of workers, same electricity use, same use of explosives & chemicals, and so on.  Thus, if they are getting 10% more gold with largely the same expenditures, a HUGE amount of that additional 10% falls to the bottom line.

 

#2

 

They finished sinking the 2nd shaft, and are outfitting it now (re-inforcing, cable drops, electricity drops, equipping the lift, etc.).  They have almost all the equipment needed already on site.  Capital expenditures for it are going to drop off HUGE in the next 2 quarters.  They anticipate getting it operational this fall. 

 

Once the 2nd shaft is fully operational, it is going to be a complete game changer.  CMCL will almost be like a different company.  They will have increased production, efficiency and safety.  CMCL has been spending almost all of their cash flow for the last 4 years on this project.

 

3).

 

With increased FCF, they are certainly going to increase the dividend.  I am going to guess that they will then fully resolve their power situation.  Either they will build a solar farm, increase their diesel generation capacity, or some combination.

 

When the power situation is rectified, the Blanket mine will then be realizing it's full capacity.

 

With that, management will turn their attention to other shuttered/neglected mines.  They have already been scouting and working with the ZIM government on this.

 

There are a few wild cards that may also crop up:

 

Gold has been rising in price, what if that continues?  Gold does not have to explode higher to have a significant effect on CMCL's earnings.  Gold is about $1,550/oz.  What if it goes to $1,700 or $1,800?  Huge increase in CMCL's earnings.

 

ZIM is a pariah state at this point.  They are desperate for foreign investment.  They have been working on this and working on getting back into the global economy.  Obviously, they have a LOT of work to do and this is going to take some time.  I think that over time, things only get better for ZIM.  What if it becomes a hot "destination" or frontier for investing?  CMCL is one of the very few ways that I know of to invest in ZIM.

 

So even though CMCL has gone up tremendously, I think they still may have a way to go.

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Guest cherzeca

I forgot the Bank Stocks in General and TARP Warrants.

 

This may be true, but everyone involved in this game pretty much have to stomach the risk. To me, it's certainly not for everyone.

 

principal major risk I see with banks is another LTCM-type blowup.  some think that the recent issue in the repo market was caused by credit hedge funds massively leveraging to squeeze profits out of a bps in arbitrage (just like LTCM), and the fed had to preemptively add liquidity to prevent a squeeze which could have caused a liquidation cascade.  assuming the fed is willing to continue to protect the banks by injecting liquidity (and also thereby protecting the hedge funds), the banks should do well...but I dont see a multi bagger unless you are willing to buy a leveraged ETF or use leverage yourself

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This thread essentially morphed into your favorite idea for 2020 thread.

 

Okay, I am going to crack the whip and get this thread back to shape.  The goal of this thread is to identify patterns that lead to multi-bagger opportunities.  I would define them as 4x or more in a decade.  That gives us a roughly 15% CAGR over 10 years.  This is roughly a 5% alpha over the S&P in the long run.  I think it is appropriate to think this way because there are good ideals that are also very safe.  But they tend to be under written to a lower CAGR, i.e. LAACO.  I think anything this a potential 4x in 5 years falls into this category. 

 

Heico was just profiled in Forbes recently

 

https://www.forbes.com/sites/abrambrown/2020/01/13/heico-mendelson/#4c6734984b18

 

Maybe this is survivorship bias, but it seems that Aviation parts is a very good business and the remaining survivors tend to do very well.  The often listed reason is that all parts require FAA approval which acts as a barrier to entry.  Harping on the barrier to entry theme, I keep hearing, seeing, and witnessing themes that makes certain businesses "work" and certain "not work."  High switching cost, long approval time, scale, cost advantages, stable pricing (non-commodities, even if you are the lowest cost producer, if prices drop 50%, you are still kind of screwed), high incremental margins that falls to the bottom line.  I hope this turns into a wonderful thread where we can dissect the anatomy that turns an investment into a multi-bagger. 

 

Apparently, Berry Global has compounded in excess of 20% for all its PE owners in the past.  Why does what seems like commoditized plastic packaging have such high returns?  I think it is a combination of more organic growth earlier in their ownership, stable end market demand, stable margins (although, smaller guys tend to get abuse by the suppliers a bit).  It is a sucessful private and public LBO.  Despite all the noise about ending plastic use, it is very hard to ween one off the use of plastic.  Imagine if you no longer buys OJ or Yogurt in plastic containers?  What can replace the usefulness of shrink wrap to prolong food?  Berry in its current form has a very distinct cost advantage due to its scale.  They constantly take out 500bps of cost post deal due to scale, better operations, better pricing when buying resin. 

 

The math works something like this

 

$100mm EBITDA company pre-deeal with $40mm of Cap Ex equates to $60mm EBITDA-CapEx

 

Post deal $150mm EBITDA company with $40mm of Cap Ex equates to $90mm of EBITDA-CapEx

 

Post deal, the company is a much lower capital intensity business and results in higher ROIC.  Even though Berry has to constantly pay for acquisitions to grow and you will see the cashflow used in investing go out the door every year, but it is resulting in higher EBITDA and higher EBITDA-CapEx over time. 

 

Years ago, a wise man told me about Ting and TuCows and I ignored it.  Another way that multi-baggers get created is a combination of

 

1) New products that could scale offer multi-bagger opportunities. 

2) CEOs who aggressively buy back shares when it is cheap. 

 

I am trying to broaden my mind on this. 

 

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I forgot the Bank Stocks in General and TARP Warrants.

 

This may be true, but everyone involved in this game pretty much have to stomach the risk. To me, it's certainly not for everyone.

 

principal major risk I see with banks is another LTCM-type blowup.  some think that the recent issue in the repo market was caused by credit hedge funds massively leveraging to squeeze profits out of a bps in arbitrage (just like LTCM), and the fed had to preemptively add liquidity to prevent a squeeze which could have caused a liquidation cascade.  assuming the fed is willing to continue to protect the banks by injecting liquidity (and also thereby protecting the hedge funds), the banks should do well...but I dont see a multi bagger unless you are willing to buy a leveraged ETF or use leverage yourself

 

Comment was more about the past, post 2009, rather than the future.  I recently transacted in mortgages, man the underwriting is so much more rigorous these days. 

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