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  • Chris Mayer


Updated: Dec 8, 2022

I received a package this week – a three-ringed binder documenting a 100-bagger. Peter O’Keefe, of O’Keefe Stevens Advisory, compiled this work. He bought the stock in 2013 and last year he got his 100 bagger.

Flipping through his binder inspired a few thoughts on 100-baggers and what it takes to get there. I'd like to share these thoughts with you below.

First, the basic outline of the story…

In March of 2013, O’Keefe bought Nvidia (NVDA). I’m sure you know the name. Based in Santa Clara, CA, Nvidia is the inventor of the graphics processing unit, or GPU. As O’Keefe notes in his memo, Nvidia was the leading developer of 3D graphics and multimedia processing technology used in personal computers.

The stock was $12.50 per share with a market cap of $7.7 billion. (Split-adjusted, that's a stock price of about $3 today. The stock hit $329 last year. More on this below...)

Right away, I see something remarkable. Well, two things. The first is that he bought the stock in 2013… which means, he only had to wait eight years to get 100x, which is an incredible pace. It’s one of the faster 100 baggers on record. Most of the 100 baggers I document in my book settle in that 20-25 year range. I’m not sure what the takeaway here is, except to say that while hunting for 100 baggers does take patience, you can get there faster than you think with some luck.

The second, and more important point, is that market cap: $7.7 billion. That ain’t small. And yet. As O’Keefe writes later in the binder where he writes about his personal reflections on getting a 100 bagger: “It’s almost unbelievable that a $7.7 billion market cap can possibly grow to $770 billion.”

It is. And this gets to something I would do differently if I wrote my book 100 Baggers today. In the book, I write you should favor smaller companies and I recommend staying under $1 billion in market cap. I based that on the study itself, which showed that the median sales for 100 baggers when they started their journey was $170 million (unadjusted for inflation). They were small companies. Not tiny, but small.

I wouldn’t write that today. It's obvious that you can’t expect to buy Apple today and get 100x. Size plays into the mix. But I’d be less dogmatic about it. Yes, you should prefer smaller companies, but the more important factor is to focus on the rate at which the business compounds its capital.

So, if you find a business compounding capital at 25% per year, but it’s got a $10 billion market cap or a $30 billion market cap, I wouldn’t dismiss it. Instead, really dig in and try to assess how durable those returns are. How likely is that business going to be able to keep that pace. Because then it’s just a math problem. If the business can compound at 25% per year for 20 years, you have your 100 bagger. (Roughly. To be more precise, you’ll have an 86-bagger after 20 years and a 108-bagger after 21 years.) I’d put much more emphasis on that and less focus on the market cap, per se.

Back to the NVDA thesis: In 2013, O’Keefe noted various reasons to own the stock. Among them, the dominant and growing market share in GPUs and the debt-free balance sheet with $3.7 billion in cash. The company was spending 25% of its revenue on R&D and had a healthy pipeline of powerful products. Plus, the stock was trading for about 14x earnings.

On the valuation: I talk about the "twin engines" in the book, where you get growth but also an increase in multiple expansion. It makes the journey easier when you get it. We see the twin engines here, big time. From 14x earnings, the stock would trade for an average of 110x earnings in 2021. Put another way, it went from trading at about 90% of the market multiple to 3.7x the market multiple. Think about that).

The business itself was getting better, but you had to suss it out a bit. It wasn’t obvious - there was no eye-popping growth or high returns on capital or any of those things. But a lot was going on under the hood. The gross profit margin, for example, had gone from 34% to 52% in the prior four years.

Still, I have to say, this was not an obvious super-performer looking at the financials back then. The case seemed built more on the growing importance of GPUs in video games and cell phones and NVDA’s dominant position in the market. And then peeking around the corner to see how the business would soon grow tremendously and earn higher returns on capital.

Which leads to another comment: Sometimes you have to hang on a thesis on an idea that's not all in the numbers - yet. I have plenty of examples where you could see the compounding fairly early and you had years to get involved and still make 100x your money. Monster Beverage is one that comes to mind and I cover it in my book. And there are plenty of others. (Those are the ones I call "obvious" in the sense they are obvious looking back and they stand in contrast to, say, a junior miner that hits it big and goes from 12 cents to $12. There was nothing in the numbers that could've foretold such a thing).

There are also others where a good business makes a step change and becomes great. Those are harder, and I think I’d put NVDA in that bucket.

Another point really strikes me as I flip through this book: How we, as investors, can so easily get lost in the weeds. I had to chuckle at comments O’Keefe makes about small changes in the financials as he goes along. For example, among the negatives he cites in his first memo is how operating expenses went up 170 basis points because of increased R&D.

We all do this. I do it. We all write our notes after the quarterly earnings come out and update our models and so on. But when you step back, you realize how little those things matter. In NVDA, as with any big winner, you see it in stark relief. All those little quarterly updates don’t matter very much at all. Businesses are organic. The numbers fluctuate. They are not machines. We have to allow for some volatility in results.

One of the really interesting sections is where O’Keefe has compiled the Value Line pages for NVDA during its 100x run. Again, the same message jumps out at me. All the commentary on individual quarters, the dithering around with pennies and nickels on earnings estimates, the chitchat on the recent stock performance, the macro talk on the economy… All of it looks pointless with the benefit of time.

With every business there are a few key things to know. Call it the essence of the business, call it the beating heart, call it the core engine… something! Find out what those key things are and focus on them.

Then, de-emphasize individual quarters, recent stock performance, earnings estimates, macro forecasts, and the like. As much as possible, try to think like a private owner of a business. Think of the stock you own as you would think of real estate; it’s something you plan to own for a long time and sell reluctantly.

Another page O’Keefe included was called “dates of interest” where he kept track of a variety of headline-making stories relating to NDVA. Some of these are funny and sad at the same time. For example, a sell-side downgrade to “underperform” in December 2016. From that perch, that stock would triple in 3 years. I’ve never understood why sell-side analysts have any pull at all. But investors constantly move stock prices based on what these people say.

O’Keefe also notes the difficult drawdowns. The stock fell 57% in 2018. From that low, it would go up nearly 10x in the next three years. Even from the high, you’d earn 5x your money if you stayed put – and you could’ve done a lot of better if you bought more.

Obvious lesson here and one I don’t mind reiterating again and again: Nearly all of these 100 baggers suffered big drawdowns – as in more than 50%. It’s just a fact of investing life, you’re going to suffer through them if you commit yourself to be a long-term owner of businesses through public equities.

Astute readers will note that NVDA is not a 100 bagger for O’Keefe anymore. It’s been cut in half since the 2021 highs… which led to a joke O’Keefe wrote in a note to me that accompanied the binder:

“How do you turn a 100 bagger into a 50 bagger? Wait one year!”

Funny. Of course, it works the other way, too. The stock doubles from here, his 50x is a 100x again. And this is another important point about 100 baggers: The really big gains come later. After the first decade of compounding at 20%, you’re up only 6x – which seems a long way from 100x, even though you’re about 40% of the way through in terms of years.

One last point: In his personal reflections, there is an item he mentions that is very, very important. (That's two "very's" - how about that?) He says, you need "a business structure that will allow individual participants to hold long-term and become overweighted in a single position in the stock portfolio."

Yes! Now as an individual investor, you don't have the same constraint. But you do need to resist the urge to trim winners - as long as the company is performing.

Needless to say, NVDA has become a large part of O'Keefe's portfolio. That's something that is not possible in a lot of set-ups. And I have come to think the "secret sauce" to long-term outperformance as an active manager lies in concentration and allowing the portfolio to become "unbalanced" over time. Your big winners are going to pull a lot of freight for you, but you have to let them. They can't do that if you're constantly cutting them back (or worse, selling them outright).

There is a lot more I could say and a lot more to mine from O'Keefe's binder, but this post is getting long as it is. And I’ve said it all already, in my book 100 Baggers and on prior blog posts. I hope you found this review of the NVDA case file worthwhile. I certainly enjoyed going through it.

A big thank you to Peter O’Keefe for sending me his work and for documenting his experience in such a thorough manner. It did stimulate some thinking. And I found it inspiring.

And thank you for reading. I wish you and yours the best this holiday season and I’ll write you again in the new year — 2023!




Published: December 7, 2022

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