Multi-Bagger Opportunities With Realistic Positive Outcomes

[Jurgis]

Motley fools rule breaker portfolio seems to have a lot of multibaggers. I don’t know their hit rate, but they are defining onto something, imo.

 

Anyone knows what's currently in Rule Breaker portfolio?

[Guest oakwood42]

Long time listener, first time caller. The topic of this thread made me bite the bullet and pay the entry fee.  For the first time in 6 years, I feel that I may  have something of value to contribute to this beautiful forum.

 

I’ve read all I can on the topic of 100 baggers; my attached notes are compilation of all the important points I’ve taken away from the readings.  Nothing here is my original ideas, I’m not smart enough so I take no credit other than jotting down what I deem as important.  I hope some find useful.

 

FIH.TO & TRU.TO are my only two potential multi bagger holdings. Sadly some others I've invested in are no longer publicly traded.

 

Thanks for some of your ideas on this thread. I'm deep down the rabbit hole on some of them.

 

Happy Hunting.

 

Pedro,

 

Great notes and this is exactly the kind of discussion that I was hoping for! As the official moderator, I declare this thread officially a success because it convinced a long time listener to pluck down the dollars to become a member!

 

+1

[Spekulatius]

Motley fools rule breaker portfolio seems to have a lot of multibaggers. I don’t know their hit rate, but they are defining onto something, imo.

 

Anyone knows what's currently in Rule Breaker portfolio?

 

I believe that Netflix, Shopify and Amazon are in, based on what I heard in their podcast.

[bizaro86]

I think total addressable market is an important concept for multi-baggers. If there isn't white space in the market they can expand in, it will be hard to get truly large multiples. This probably depends how many baggers you're looking for. A double or triple could be a little bit of growth combined with multiple expansion, but once you are going for 10x or more you need significant business expansion.

 

The only significant multi-bagger in my portfolio right now is ROST. I think retailers/restaurants are in many ways great growth businesses. If they've figured out a plan that generates high ROEs in multiple regions, it seems pretty likely that it would transfer to the whole country. That gives you a potentially long runway for high ROE reinvestment if you catch it early enough.

 

Munger's example of Costco fits this perfectly. I got into that one too late to get to any truly large multiple of my initial purchase price, although I think I'm close to 2X (mostly on multiple expansion...).

[SafetyinNumbers]

I like margin expansion, deleveragings, management changes and special situations like spinoffs or anything else that causes indiscriminate selling.

 

All of those things can cause multibaggers if the multiples have contracted too much especially on unusually low margins. Sometimes you can get all of these opportunities in one name like ATTO. Technically for ATTO the indiscriminate selling by portfolio managers like Wellington might have just been because they expect the PIK Note holders to be indiscriminate sellers so they became indiscriminate sellers first. I don't know if that's true but the narrative fits the fact pattern.

 

The surprise will be if the PIK Note holders (of which there are only a handful) agree with the bulls even half way on valuation and don't sell stock. I think there likely are fundamental investors that have looked closely, agree that it's too cheap and have not bought or not bought their full position. I expect it's because they expect the PIK Note holders might sell or can't afford to own it if they do sell (even if it's a low probability) because it means they will underperform their benchmark. No one is paid to own ATTO if it underperforms the benchmark and especially not professional money managers who have clients that trigger a manager review if they miss their assigned benchmark by a certain margin.

 

I find with the list of characteristics for 100 baggers that it resembles the characteristics of the most highly valued stocks in the markets based on most quantitative factors except for size and maybe insider ownership. The current market certainly favours size over anything else given the passive money and all of the ETFs looking for "investable" stocks. Active managers are definitely big fans of insider ownership. That leaves less room for stuff like ATTO.

 

Maybe it's been too easy for too long to buy big cap growth or dividend growth depending on your personality that more small stocks are getting more undervalued than normal. The last bear really put a price on liquidity which means there are just less eyes looking.

 

I was listening to this Macrovoices podcast today (https://www.podbean.com/ew/pb-w8zsy-d0d01f) and if you buy into the guest's view, we are close to the end of very low interest rates because debt monetization is coming. I don't know if the forecast is reasonable or not but I certainly benefit more in my portfolio if long rates go up and I also don't own a lot of high growth high multiple stocks because higher interest rates should mean multiple contraction (I think at least). That could hurt many stories that people assume have the chance to be multibaggers soon.

 

Of course, even if that analysis is right, it doesn't mean any given value proposition is going to result in positive returns including ATTO in which I am very much in the red so far.

 

 

[Jurgis]

Motley fools rule breaker portfolio seems to have a lot of multibaggers. I don’t know their hit rate, but they are defining onto something, imo.

 

Anyone knows what's currently in Rule Breaker portfolio?

 

I believe that Netflix, Shopify and Amazon are in, based on what I heard in their podcast.

 

AMZN and NFLX are their ancient picks - not that this disqualifies them as great picks.

 

Apparently though Rule Breakers have way more picks than the ads seemed to imply. I found this: https://daytradereview.com/motley-fool-rule-breakers-review/ . Seems like a new recommendation every 2 weeks  ::). That's way too many Rule Breakers IMO. This also explains why they can claim stratospheric returns on famous stocks: you pick 26 growth stocks a year, you have 260 stocks in 10 years >1/2 of SP500! You gonna have the 10x results on some of them ( here they also claim huge returns on BIDU, TSLA, ISRG: https://www.thestockdork.com/motley-fool-rule-breakers-review/ ).

 

Looking at the 2016-2017 recommendation list, it's mostly known cos. Though perhaps they recommended them earlier than I looked at them. I'd have to look at my (nonexistent :) ) notes to compare. And I can't claim that I bought (substantial) positions in the winning ones.

 

Anyway, it might be a good hunting ground, though I'm not sure I'm gonna subscribe.  8)

[Gregmal]

It’s not really anything more sophisticated than a “throw a wide net, catch a lot of different stuff” approach with some salesmanship incorporated. Criteria for selection all fit the same pattern. Large TAM, high growth rate, large short interest, fairly new approach to tackling some “need”. A lot of picks and shovel plays too.

 

It’s not hard to understand or screen your own “rule breakers”. For every Netflix there are a half dozen Westport innovations. For every Sierra Wireless, someone with half a brain, on their own can find an Inseego or Skyworks.

[Spekulatius]

Motley fools rule breaker portfolio seems to have a lot of multibaggers. I don’t know their hit rate, but they are defining onto something, imo.

 

Anyone knows what's currently in Rule Breaker portfolio?

 

I believe that Netflix, Shopify and Amazon are in, based on what I heard in their podcast.

 

AMZN and NFLX are their ancient picks - not that this disqualifies them as great picks.

 

Apparently though Rule Breakers have way more picks than the ads seemed to imply. I found this: https://daytradereview.com/motley-fool-rule-breakers-review/ . Seems like a new recommendation every 2 weeks  ::). That's way too many Rule Breakers IMO. This also explains why they can claim stratospheric returns on famous stocks: you pick 26 growth stocks a year, you have 260 stocks in 10 years >1/2 of SP500! You gonna have the 10x results on some of them ( here they also claim huge returns on BIDU, TSLA, ISRG: https://www.thestockdork.com/motley-fool-rule-breakers-review/ ).

 

Looking at the 2016-2017 recommendation list, it's mostly known cos. Though perhaps they recommended them earlier than I looked at them. I'd have to look at my (nonexistent :) ) notes to compare. And I can't claim that I bought (substantial) positions in the winning ones.

 

Anyway, it might be a good hunting ground, though I'm not sure I'm gonna subscribe.  8)

 

Well, it is correct that they have a pick every 2 weeks, so they can be 26 picks a year (unless have repeat recommendations which is certainly the case), so it is a wide net as Gregmal correctly stated.

 

I do think they caught some pretty big fish in the past, so to me, the MF Rulebreaker or Stockadvisor seems like a pretty good starting point. It seems they based on the review site you posted, the Stockadvisor actually has outperformed the Rulebreaker.

 

I personally never had been much of a growth investor, but have been thinking about changing my approach a bit (call it New Years resolution!) and while I probably could find and figure out all these stocks myself, it is probably more efficient to have someone else present a bunch of predigested opportunities to me. I am thinking of subscribing.

[Gregmal]

Another thing I think worth pointing out is that people seem to severely overrate the difficulty of finding “multibaggers”. Assuming you are able to establish certain “quality control” criteria, I think folks would be surprised by frequency that their holdings did 2x or more over the course of a 5-10 year holding period, should you just leave them the heck alone; especially if can time your purchases with some sort of macro based pullback.

[BG2008]

There is an area of simplistic long term compounding that we have not really discuss in detail on this thread.  After the Great Recession, I was looking at a lot of net-net ish type companies trading at 6x FCF.  Cybex was one such company where it was a net-net and the operating business was trading for 6x FCF for free.  My focus was on a few of these and it was harder to determine how a company like Cybex would compete in a rather fragmented gym equipment manufacturer market.  Cybex was a net-net because they had a lawsuit where a trainer crushed herself and the liability was potentially the entire EV of the company.  But they settled for $20-25mm and the company had reserved that amount already.  Price run up and the remainco was a net-net with a free operating business.  Somehow I still didn't pul the trigger after talking to management as they sounded kind of pessimistic with the macro.  Of course they did a MBO at a 90+% premium with a month.  That was where my focus was.  In the meantime, the US large caps were consistently trading at 10xFCF. 

 

In comparison, a 10x FCF versus a net net with a free operating business, as a younger value investor, it was no brainer to look at the net-net with a free biz.  In hindsight, the 10x FCF large cap with moat was paying you a 3% dividend and buying back 7% of the shares out standing.  It was also growing 4-6% organically each year.  This same pattern went on for many years.  So, every share that got bought back in 10, 11, 12, 13, 14 became extremely accretive as the market eventually valued them at 25x FCF.  Is 25X FCF the appropriate multiple?  Not sure. 

 

The simplistic multi-bagger were sitting right in front of us back in 10, 11, 12.  It's always very obvious in hindsight.  Let's say that the right P/FCF is 15-18x, the share buybacks in 10, 11, 12, 13, 14 at 10-12x FCF is still extremely accretive especially combined with 4-6% organic growth. 

 

If you are hunting for 3 baggers in 5 years, perhaps the easier targets are the 10x P/FCF with 4-6% organic growth with dividends and share buybacks.  You don't need 100 bagger heroics. 

 

One thing that I have come to appreciate is that $5bn companies tend to have structural moats that is much easier to recognize such as Berry and DuPont.  You can readily see it in the margins.  Their FCF is also quite real and you are literally getting paid each year via dividends and sharebuybacks.  If the stocks trades to 7x FCF, you can back the truck up and buy a boatload more.  Perhaps it was inexperience coupled with living through 08-09 when companies like Fortune Brands, Home Depot, CableCo, VF Corp etc all trading to mid Single Digit trough P/FCF that I was a bit shellshock.  I winded up gravitating to companies with large B/S protection.  My age is also a bit interesting in that I was in HS when the dot com bubble was in full blown and I was 28 when the Great Recession hit.  So that was two dramatic cycles in 10 years. 

 

Over the years, I have come to appreciate that good long term returns require the proper leverage.  Howard Hughes won't work without some non-recourse leverage at the operating asset portfolio.  A multi-family portfolio with 20% LTV isn't going to work well in the long run. 

 

I am not saying this is the truth or the absolute best way to look for multi-baggers.  But it is likely a simple area to hunt that tends to be overlooked. 

[BG2008]

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.

 

Info, 

 

A lot of my valuation framework comes from following the company closely and talking to management team and parsing through their quarterly calls.  The delta between your numbers and mine is largely due to a couple things.

 

First, I think Montana is doing $100mm of EBITDA.  So at 5x, it is going for $500mm. 

Second, they have said on the calls multiple times that if they sell Montana, they will de-lever below 3x pretty quickly.  So, if they are at $1.2bn net debt at year end 2019 with roughly $300mm of EBITDA which puts them at 4x.  They have referenced a 4.2x figure.  Now Q4 of 2018 was a windfall.  So netting $500mm of proceeds and taking away $100mm of EBITDA and paying debt down by $100mm in 2020 puts the leverage at roughly 3x to $600mm of net debt and $200mm of specialty EBITDA.

Third, I have been to a lot of meetings hosted by I Banks and their recent 11% debt offering.  On the debt side, people ask a lot of questions.  Someone at one point even referenced that the $100mm secured loan on the Montana refinery puts it at 50% LTV, that means Montana is only worth $200mm.  They have quelled those concerns and mentioned that people should not read too much into.  At one point someone might have referenced a $400mm figure and they had a look of "no way, we will sell for that little."  Let's call it tea leave reading. 

Looking at this as a FCF play.  $100mm of EBITDA and likely $30mm of Cap Ex a year, this is $70mm of FCF.  $500mm puts it at 7.1x P/FCF.  The key here is that there is a $20-22 spread between WCS/WTI.  This figure largely reflect the cost of getting a barrel of oil out of Canada to the US Gulf Coast.  Montana captures that value.  I think the Great Falls property makes a lot of sense for a Canadian Tar Sand producer.  It will actual as a natural hedge with the takeaway capacity.  If new takeaway capacity comes online, the refinery loses value but they make money on the oil production.  If takeaway capacity continues to be an issue, the Montana facility winds up capturing that rail economic.  Management has consistently said that the longer time elapsed, the more likely they are to sell the Montana refinery.  As the debt to EBITDA ratio continues to trend downward, they can afford to take a lower price to de-lever the balance sheet.  I don't fully understand the impact of IMO 2020.  But management has consistently stated that it will benefit them due to their ability to process the high sulfur crude.  There are different components that involves VGOs and etc that is a bit above my pay grade.  Some products gets lower pricing, some products gets higher, but overall, it's a positive for Calumet's Montana facility.   

 

This name requires patience and nothing will happen for another 2-3 years until to turn on the distribution or if they convert into a C Corp today.  But the value keeps getting shifted from the debt side to the equity every year that they pay down the debt.  Perhaps, we should start a Calumet thread on its own. 

[Cardboard]

"The key here is that there is a $20-22 spread between WCS/WTI."

 

My view is that if you are betting on that to last forever you are mislead.

 

However, I can identify a potential buyer for this asset who has delevered and mentioned in the past that they would be inclined to buy more refining assets as an hedge: Cenovus.

 

 

[Spekulatius]

"The key here is that there is a $20-22 spread between WCS/WTI."

 

My view is that if you are betting on that to last forever you are mislead.

 

However, I can identify a potential buyer for this asset who has delevered and mentioned in the past that they would be inclined to buy more refining assets as an hedge: Cenovus.

 

I doubt that a large company like Cenovus will buy a tiny refinery of 25k throughout. It’s too small to invest much in it (refinery is a business where scale counts). If anyone buys it, it’s going to be a scrappy small operator.

 

[BG2008]

"The key here is that there is a $20-22 spread between WCS/WTI."

 

My view is that if you are betting on that to last forever you are mislead.

 

However, I can identify a potential buyer for this asset who has delevered and mentioned in the past that they would be inclined to buy more refining assets as an hedge: Cenovus.

 

Exactly, it's a hedge for someone like Cenovus.  Yes, 25k isn't enough.  But you're giving up $20-22 a barrel to the rail, do you not consider even small solutions? 

 

"We have 50 percent ownership in two U.S. refineries – Wood River, located in Roxana, Illinois, and Borger, located in Borger, Texas – that are part of our joint venture with Phillips 66, the operator. Ownership in these two refineries reduces the risk of price fluctuations in the oil market, by allowing us to capture value from the production of oil through to the output of finished products such as gasoline, diesel and jet fuel. Essentially, we shift from being just a producer of heavy crude oil to being a producer of higher-value finished products. This helps to reduce our risk and balance out the volatility in our business.

 

In 2017, the two refineries processed a combined average of 442,000 barrels of oil per day gross, compared with 444,000 barrels of oil per day gross the year before."

 

So these are effectively 100k barrels a day each for Cenovus due to their 50% ownership.  The advantage of Great Falls, Montana is that it is just across the border from Canada.  By the time you get that crude to TX, the railroad has already extracted their $20 a barrel.  You get the crude to Great Fall Montana and it saves you the rail fare from Montana to Texas. 

[Spekulatius]

For someone like Cenovus, the better way would be to boost the throughput of existing refineries using Capex. Small Subscale refineries are just inefficient for Large companies to operate. Also, if the WCS/WTI differential will be smaller going forward, this refinery would become a liability.

 

US refineries are the best way to invest in shale oil or oil sands. Look at PSX, a first class operator. Buying back 5-10% of their shares every year and paying ~4% dividend.

[RadMan24]

BBBY.

[DW1234]

Taleb talks recently about ergodicity, which in terms of math and physics is a pretty tough chew, but in terms of investing is somewhat easier to understand:  how best to avoid ruin is to compare two $100 bets on a flip of coin, over a non-infinite time series of flips.  investor #1 puts all $100 on the single coin flip...and if wins doubles bet and continues with the single coin flip..and eventually faces certain ruin.  investor #2 gives $1 each to 100 participants, and asks them to make same bet strategy.  at end of a certain equivalent series of flips, investor #2 is much more likely to have better result than investor #1.

 

you can say that this is diversification but it really isn't in the sense that all bets are the same...a coin flip, doubling bet, same payoff odds.  what is different is the effect of the time sequence.  I have been thinking about investing in terms of diversification over time rather than over diversified investment metrics/factors, and the notion of sizing multi-bagger bets over time sequence may be more meaningful than allocating to different exposures in accordance with industry/risk profile etc.

 

put another way, in the case of every multi-bagger opportunity, there will be a reason not to invest...ie the monster beverage short writeup.  think less in terms of the certainty of investment merits (which in the case of a multi-bagger opportunity is always daunting since that is why it is a multi-bagger opportunity) and more in terms of being exposed to a time sequence of acceptable opportunities

 

edit:  I looked over some notes and found this which is a not bad look at the concept in the investment context:  http://squidarth.com/math/2018/11/27/ergodicity.html

 

Interesting post. But isn't this in some way just saying that if you can choose between 1 investment or 5 investments with both about the same EV and uncertainty, you should always choose 5 investments?

 

Intuitively I feel like most investors use this concept already by having more than 10-15+ stocks in their portfolio.

 

Could you give an example of when/how this concept can be used in a portfolio ELI5?

[nspo]

For me, like many others, Bery is a great choice. I tend to read Packers work (Bonhoeffer) and agree on his current views. In such a low rate environment there's huge incentives for equity investors to take advantage of companies that arbitrage the ROE/debt spread. Looking at the rollups/stubs is where the big fish are swimming. That said, ADT is another interesting play that I think will triple on fairly conservative assumptions over the next several years. Naturally recurring revenues, locally dominant, rolling up the competition, and trading over 12% fcf yield on pre-covid numbers. The current epidemic should have very little effect on their earnings streams.