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  • Writer's pictureChris Mayer

The Anatomy of a 100-Bagger

“The Anatomy of a 100-Bagger” was the title of a talk by Warren Kanders, moderated by Dan Roller of Maran Capital Management, at the Casulo Symposium this week in New York.

I’ve never heard of Kanders before this… but goodness, this guy is a value creator. Here’s the blurb from the program:

“Serving as CEO and Chairman, Warren B. Kanders built Armor Holdings, Inc. from a public company with $12 million of revenues and approximately $1 million of EBITDA in 1995 to approximately $2.36 billion of revenues and $286 million of EBITDA in 2006, acquired the following year by BAE Systems for $4.5 billion. In conversation with Dan Roller of Maran Capital, Mr. Kanders will explore the art of creating a 100x bagger in public markets.”

The stock escaped my study of 100-baggers, probably because it slipped beneath my minimum size requirement. I didn’t have time to research Armor very carefully, but from what I gather online, Armor delivered a 49% CAGR for the dozen years before BAE acquired it. That’ll get you to 100-baggerdom.

Here’s a table I included in my book 100-Baggers that shows you the return you need, and for how many years you need it, before you hit 100x:

A dozen years at 49% returns about 120x. Whatever the particulars, Kanders’ talk touched on various parts of that 100-bagger anatomy. I’ll go through three of them below.

First part: A good starting price.

Kanders acquired a controlling block in Armor from a troubled seller. As he tells it, a family in New York controlled the company, based in Jacksonville, FL. The company got in trouble with SEC and had financial problems and so Kanders got a good price for his stake. (How good is hard to tell).

Dan Roller, who set Kanders in motion by asking a few questions, pointed out that Armor traded for 10x earnings “at the start” and BAE paid 24x earnings in 2007.

How much of that windfall gain came from the stock going from 10x earnings to 24x? A lot – like 2.4x more. Okay, so nobody is going to be upset with a 50-bagger over 12 years instead of a 120-bagger. But it just goes to show you the power of getting that valuation lift. I mean that’s a huge difference.

In the book, I talk about the twin engines of 100-baggers. One engine is to have underlying earnings (or cash flow or book value or whatever the relevant metric is for the business) grow at a high rate for a long time. The second engine is to get that valuation lift.

The ideal candidate would have both of these twin engines working for you. But we live in a world that is less than ideal. And so if you get a great business that can compound for a very long time at a high rate, I wouldn’t chafe too much at paying up a bit.

Second part: Invest in a business that makes things people really want/need.

Armor made body armor for police officers and soldiers. Kanders talked about how, when he bought this business, he didn’t know anything about body armor or the industry. But a couple of things about the business attracted him.

One is that the product can’t fail. Meaning, there is zero tolerance for a faulty product. And that makes customers reluctant to switch to something new. They stick with what works.

Second, the people in the company had a missionary zeal about the importance of its product. Kanders told a touching story about how, during his due diligence on the company, he met with a few women who did the sewing on the body armor. These women had worked without pay for a time when the company was in trouble.

He asked them why they kept showing up for work even though they hadn’t been paid. They told him they all had sons or daughters (or knew people who had sons and daughters) who were police officers and soldiers. They knew these people in the field needed this armor. And they came to work to be sure to make what they wanted. That’s a powerful sense of mission in a company.

Kanders said that the company’s armor saves 30 or so lives per year. And every time the company got news that, say, a police officer survived because of their armor, the company would stop the plant. Someone would then come on the floor and read the details of how that officer survived.

Thomas Phelps, who wrote the original book on 100-baggers – 100 to 1 in the Stock Market – emphasized this “do good” aspect in his book. In fact, he had a whole chapter on it: “Profits in Ethics.” Here is a summary of his view:

“He profits most who serves best. In the long run that is just as true of corporations as of individuals. Beware of cynics in high places. Avoid the fast buck artists, the something-for-nothing shysters. Remember that a man who will steal for you will steal from you. Ask yourself whether the company in which you contemplate investing is contributing to making this a better world. If the answer is no, avoid it like the plague.”

This is partly why I now won’t even bother looking at stocks in things such as life settlements. Do they really help their customers? Or is the business more about taking advantage of its customers? There’s something to be said for good karma.

I know this is a murky area. And certainly if you followed Phelps’ advice, you never owned tobacco stocks, which have been big winners. But this is one of those guidelines in life that aim to keep you out of trouble. It’s like advice about avoiding companies with bad balance sheets. It’s not that you can’t make money betting on over-leveraged firms. The rule keeps you out of an area that often hands people losses.

Third part: A bit of luck.

Kanders said he had a view that the world was going to continue to be a dangerous place. He had a macro view that there would be more social and political “friction” as he put it.

Be that as it may, Kanders did get “lucky” in the sense that bad things happened, which helped his business enormously. We had 9/11, we had/have wars overseas. And this created huge demand for Armor Holdings’ goods.

Here is an excerpt from a Reuters article in 2007, when Armor announced the deal with BAE:

“Armor Holdings’ stock has shot up since the start of the Iraq war, now worth nine times what it was in early March, 2003.

Snipers and roadside bombs in Iraq and Afghanistan pushed the Pentagon to order more of Armor Holdings’ protective gear, and armor sales are set to rise despite mounting pressure for U.S. forces to withdraw from Iraq.”

I talked about luck in my book because it seems to me to play an undeniable role. I used the example of Apple. People who bought Apple at the start of its 100-bagger run could have no inkling whatsoever about iPhones, for example. And people who bought Amazon back when it was just a bookseller could in no way foresee the rise of AWS. I’m sure we could come up with a long list of such examples.

Finally, let’s not forget that 2007 was a pretty darn good time to sell anything.

Sometimes, you just need to get lucky.

While you can’t control your luck, you can cultivate good luck by investing with people who are opportunistic and alert to new opportunities. Steve Jobs, Jeff Bezos… and Warren Kanders, all examples of the kind of people you want to partner with. (And this should probably be a fourth part: invest with owner-operators. Kanders owned a lot of Armor).

What’s Kanders doing today?

Kanders is today the Executive Chairman of Clarus (and owns 22% of the stock). It also has an interesting story. Could it be Armor 2.0? Dan Roller writes about it in his fourth quarter letter:

Maran’s 4Q 2018 Letter

Well, I’ve prattled on enough here. Let me end by saying something about the Casulo Symposium itself.

It is a new event organized by my friend Shai Dardashti. Casulo is Portuguese for “cocoon.” And it stands as a metaphor for what Shai hopes to create: an idea-rich group from which spin many butterflies (winning ideas!).

I would describe the symposium as like Grant’s Conference except for stock pickers. Meaning, it’s aimed at a sophisticated audience and the content is more about concepts and processes than about tipping actionable ideas. I found it worthwhile. And I especially enjoyed meeting and talking to fellow attendees.

*** Mailbag

A reader writes, following on last week’s comments about Interactive Brokers:

“Being a customer of IB, I am optimistic about their growth prospects. While I would like 20% plus growth, I'd be happy with anything low teens and above. With that said, there is one other thing that I think will drive more users to IB. It's the changes they have been making to their desktop platform and the app. Both have become far more user friendly and intuitive that they used to be. And customer service, while not perfect, has also gotten much better. I think they have always had an engineering mindset and that is how they originally built the product (using words like "Instrument"). But lately, it looks to me that someone over there is thinking in terms of UI and flow, which is fantastic. While they don't design the product for the average E*TRADE user, I think it would be easier to take some of the power users at Etrade if they continue fine-tuning their existing product. The margin rates at E*TRADE are 8-10% which is reason enough for many of them switch over.”

I agree and thanks for the note.

And thanks for reading. You can write me at info [at]


Published April 26, 2019

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