922% up in 1826 days is impossible. Right?
A quest to recreate a portfolio of the "Best Performing Stocks over the Past 5 Years" going into the next 5 years.
Look, I’m Mr. Mimetic. Can I turn 5000$ into 46.100$ in just 5 years, just by piggybacking a recipe?
Without a drop of sweat? Or making my hands dirty? Just by picking some stocks on the stock market thingy?
Probably not.
Hindsight is always right. Pushing on some computery buttons to find the best-performing stocks of the last 5 years is one thing; repeating it for the next 5 years without the advantage of a rearview mirror would be…epic.
No shame in trying to be epic, though. No shame in standing on the shoulders of giants, either.
They be giants
In the summer of 2020, gamers-turned-WallStreet-weirdo’s ALTA FOX CAPITAL published a report called "The Makings of a Multibagger"
Despite in desperate need of a better haircut, they took the time to analyze the best-performing stocks between 2015 and 2020.
Those stocks returned a whooping average of 922% in just 5 years, versus the measly 55% of the S&P500.
And instead of boiling this analysis down to some cute little recipe we all can follow, they wrote a 645-page long report on it, full of nuance and buts and ifs and exceptions.
So yeah, they proved to be smarter than Mr Mimetic. And harder working. Also, they are a lot richer. (Mr Mimetic is dirt poor). But Mr Mimetic still has the better hair.
The recipe
Luckily for us, there is the Pareto Principle. As far as Mr Mimetic remembers 80% of the work only leads to 20% of success. And 20% of the work leads to 80% of success.
So let’s boil it down a little.
Let’s put all their hard and smart work into some recipe we can all easily stick to and try to copy that past performance into the future. Yeah, baby.
step 1. Growth.
The first ingrediënt is an obvious one. For the stock to rise, the company needs to grow.
How much? Not that much, actually. A minimum of 15% a year.
In EBITDA that is.
EBITDA is Earnings Before a whole lot of real-world expenses and it is a metric that Buffett famously dismisses as a “tooth fairy” metric.
So why on earth take the risk to only take a look at EBITDA? It baffles us. You smarter than old man Buffett now, boys from Alta Fox Capital?
Mr Mimetic might look for EBITDA growth, just to stick to the plan, but will take a look at Free Operating Cash Flow (calculated as Cash From Operations minus Capital Expenditures and Dividends Paid) as well.
And we will look at the Compound Annual Growth Rate for the past 5 years. And then get high on Hopium that those companies can repeat in the future what they did in the past.
Which is not a given. Mr Mimetic used to run 10 miles every Sunday. That’s in the past, alright. Can’t see himself doing that in the near future.
Oh yeah, and the growth is preferably +25%, although 15% might do, apparently.
step 2. Start smallish.
It’s easier for a baby to double in size than a grown man.
So the second ingredient of our recipe is to pick rather small companies in stock market cap.
Not really small, since 2 billion$ in market cap is considered small by those rich unworldly furry mammals.
Personally, Mr Mimetic is of the opinion that in the real world a 100 million company is already a thing of beauty, but in terms of statistics and the whole scale of the markets worldwide, 2 billion$ is smallish.
Also, the market cap is a factor of price per share. As a plus, any under 2 billion$ market cap stock weeds out stocks with really outrageous valuations. (Mr Mimetic is looking at you, Tesla)
step 3. Cheapish
This brings us to valuation.
Most successful companies never really have low valuations. And when growth is combined with margin expansion (more income per dollar sold), some magic snowballing can happen.
According to the Foxes valuations as high as these have no influence on performance:
3x trailing Sales
20x trailing EBITDA (again? you fools)
30x trailing PE
And according to some calculator porn from this other clever fella, 30x Earnings per Share should correspond to about 20% growth:
So we should be good with 30x PE vs 25% EBITDA growth.
step 4. Health
To be able to grow for 5 years, you have to survive for 5 years.
Healthy companies have access to fresh capital when it matters most.
Anything can happen that disrupts your habitat. When you don’t have the cash to be flexible in a changing environment, you’re as good as dead on arrival.
The only time to be leveraged is when everybody around you is dying and they are blocked from access to capital.
The Alta Fox report is not really outspoken about how they view Financial Health.
We can take a look at a few ratios:
current ratio > 1
quick ratio (acid test) > 1
cash from operations/net debt (net debt = total debt - cash etc)
Although, when it comes to financial health Mr Mimetic tends to lean on legendary investor Marty Whitman. Marty sees Financial Health as creditworthiness.
Whitman is suspicious of earnings and likes hard assets that you can lend against.
With all the software and digital and service companies popping up like weeds, this might be a bit conservative.
So let’s settle on positive tangible equity, as a proxy?
Either way, it will be a judgment call.
step 5. Shop around
This one is not really necessary per sé, but it is an ingredient that tends to pop up quite often.
Acquisitions.
Overpaid Mergers and Acquisitions are often the equivalents of the Grim Reaper for your stock returns, but when done smartly… you can get a Constellation Software.
One way to see if Acquisitions are smartly done is to compare the growth in debt with the growth in revenue and/or profits. On a per-share basis, because some delusional CEOs might raise the stock count into oblivion, without something actually valuable to show for it.
Average of Return-in-invested-Capital or Return on Capital Employed might be a starting point.
The great stock-picking columnist Richard Beddard shows how “it is useful to calculate a version of ROCE that excludes goodwill and acquired intangible assets” when it comes to acquisitions.
So yeah, smart acquisitions are good, but whether they are smart or not is not readily seen in the accounting. It will take some figuring out, mostly by digging into the actual Annual Reports and using spreadsheets and such.
Damn. Wasn’t counting on that, since Mr Mimetics’ time is supposed to be his only real currency.
step 6. Downhill skiing
It only goes downhill from here.
Next ingredient on the list is “barriers to entry”. In some form.
When the competition doesn’t even bother to try, it’s like downhill skiing as opposed to uphill climbing.
The problem is: how are you comfortable with assessing that?
Mr Mimetic is no industry expert, nor is he interested in becoming one, for every single industry in the world, in every single country in the world.
Luckily, the barriers don’t even have to be that high. Some moderate form of Moat around the industry is good enough, according to the Young Guns at AFC.
Unfortunately, it might require some reading. Again.
Mr Mimetic wishes more companies were cocky about how they don’t even have real competition. Like this one.
Step 7. Be Unique
Have a competitive advantage. And make sure it is not easily copied, breached, or made obsolete.
Easier said than done.
Most competitive advantages are a juggling act of holding the exact amount of balls in the air at exactly the right pace and time and velocity.
And you wonder how it is not copied.
Apple. Nike. Google. Pixar. Ikea. Common, you guys: how hard can it be?
Very hard, it seems. No amount of clothes can give you the natural charisma that stands out.
Yet, as opposed to charisma, a competitive moat is very hard to spot beforehand when you’re not an expert. (Except for Google, that one was obvious from the start)
Margins that are consistently higher than other players in your industry might tell us part of the story.
And maybe, we should just have the courage to step away when we are not capable to know or understand the advantage. Better be a coward, than fool-hearted.
Step 8. Something Extra
Mr Mimetic could only steal 7 ingredients from the report.
Wish I was a better thief.
However, these 7 should be enough to spot and select companies in an equal-weighted portfolio, that outperforms on an epic scale.
Hey, that’s what history tells us anyway. If not, we’ll all blame Alta Fox Capital.
However, Mr Mimetic would like to add those two:
Ebitda growth > revenue growth.
insider ownership
Not as a decision point, but as a data point. As a blanket, just to feel more comfortable.
Let’s eat cake.
As often and as irregularly as his real life allows, Mr Mimetic will search for companies worldwide that have a mixture of these 9 ingredients. This blog will be the travel notebook of his quest.
If found and deemed fit, Mr Mimetic will add the stock to the virtual Mimetic portfolio, called the Mr Mimetric Fox Fund. Updates on the performance of the portfolio will be yearly.
I wouldn’t mind investing my personal real money into the portfolio, as a sign of good faith, credibility, incentive and have you not, except I wouldn’t know where to find the extra dough.
I will update if that changes.
