Searching for 100-baggers

Sterling fell -4.3 per cent against a resurgent US dollar to 1.22 and -1.5 per cent against the euro to 1.10. Markets are reacting to an increasing likelihood of a no-deal Brexit and a general election before the year is out. The fall in the government's working majority to just one adds further fuel to the fire. Given the high percentage of overseas earnings in FTSE 100 constituents, sterling's weakness helped the index gain 2.2 per cent. Whether Boris Johnson becoming prime minister helped the market is open to debate. The FTSE All-Share (Total Return) Index, which includes more domestically sensitive, mid and small-cap companies was up 2.0 per cent.

Oil was calm, despite rising tensions in the Arabian Gulf. Brent crude was down just 0.5 per cent to $64.24 a barrel. Among industrial metals, nickel was up 13.6 per cent, but copper and zinc both drifted back a couple of per cent. Gold continued to be robust, up 1.7 per cent to $1,437 an oz and near its highs for the year. Bitcoin, on the other hand, continued to be volatile and dropped -18.3 per cent to $10,091. It is still up 173 per cent this year. 

Performance

Since I started the JIC Portfolio in January 2012, I have had to face up to some miserable months and take them on the chin. Returns of -8.4 per cent in May 2012, -6.9 per cent in June 2016 and last year -8.6 per cent in October and -6.7 per cent in December were not much fun to report. It is therefore lovely to be able to present the best month in the 91 months of the JIC Portfolio's existence. It was up 8.6 per cent in July 2019, beating the previous best of 7.2 per cent in July 2013. Last month's gain of 8.6 per cent leaves the JIC Portfolio up 25.7 per cent this year compared with 15.2 per cent for the FTSE All-Share (Total Return) Index. Since inception in January 2012 it has more than trebled in value, up 209.4 per cent (an annualised return of 16.1 per cent). This return compares favourably with the 90.9 per cent return from the FTSE All-Share (Total Return) Index, (8.9 per cent annualised). The longer the record, the better, but it does demonstrate how important it is to be grounded when investing. Do not get depressed after a weak month and do not get overly excited after a good one. In the end, it all balances out, and one should remain focused on one's long-term financial objectives.

The stand-out stock in July was RockRose Energy (RRE), which completed its acquisition of Marathon Oil's North Sea assets and returned from suspension on 24 July. The shares ended the month at 1,950p, up 139.3 per cent on February's 815p suspension price. That accounted for 5.6 per cent of the 8.6 per cent portfolio gain. Taptica's name change to Tremor International (TRMR) seems to have done the trick, in the short term at least. It was up 60.5 per cent in July and on current forecasts is still only valued at 5.0 times 2019 earnings. Syncona (SYNC) was up 14.4 per cent, bouncing back from, I think, a Woodford overhang in Autolus, one of his most significant holdings. Anglo Asian Mining (AAZ) was up 13.0 per cent, helped by the robust gold price, and has returned 38 per cent since I added it to the portfolio in May and June. My other gold exposure, the L&G Dax Global Gold Mining ETF (AUCO), is also doing well, up 13.0 per cent since buying in June. June's other purchase, Avast (AVST), was up 12.1 per cent in July.

Only one holding fell more than 10.0 per cent in July – Serica Energy (SQZ) was off 13.5 per cent. With no news, perhaps a bit of boredom set in and it was used as a source of funds to buy RockRose. Most of the weakness was in the last week when RockRose had relisted.

Recent activity

For the first month since its inception I did not trade in the JIC Portfolio. In the more focused JIC Top 10 Portfolio, which is up 26.7 per cent this year, I added a position in RockRose Energy (24 July at 1,859p).

Portfolio structure

RockRose Energy is now 9.0 per cent of the JIC Portfolio. I know last month I talked about position sizing and how I started to feel uncomfortable when a stock grows to over 5.0 per cent of the portfolio. I went on "that does not mean I will automatically sell; if the valuation and momentum are still in its favour, I will let it run". In RockRose's case, I think valuation is very much in its favour. At 2,000p it is trading pretty much in line with unrestricted cash on its balance sheet. Two notes, from Hannam & Partners and Whitman Howard, have price targets of 3,750p and 3,679p, respectively. Both research notes look pretty conservative to me in terms of the assumptions made, and I think do not take account of likely future deals. I have not sold a single share. I'm sticking with it and as mentioned earlier have added it to the JIC Top 10 Portfolio. With Serica Energy, which I also think looks good value, and Diversified Gas & Oil (DGOC), I now have 15.4 per cent in oil and gas. A bit steep, but given the value in the stocks and that they are dealing in a dollar-denominated product, it is not causing me to lose sleep. In my May review, I focused on how I had reduced my exposure to companies sensitive to the UK economy and increased my exposure to overseas earnings. The sale of Lloyds Banking (LLOY) at 58p looks particularly prescient. The purchase of Worldwide Healthcare (WWH), TR European Growth (TRG) and Avast have thus far added value.

I reckon that 61.1 per cent of the JIC Portfolio by value is currently exposed to overseas earnings and that a further 15.4 per cent of the portfolio is exposed to dollar-denominated products, ie oil. That leaves under 25.0 per cent in businesses that are mainly but by no means wholly, UK centric: Duke Royalty (DUKE), Scientific Digital Imaging (SDI), Bloomsbury (BMY), Games Workshop (GAW) and AdEPT Technology (ADT). Predicting the future is a mug's game, but I struggle to see a scenario in the next few months where there is a meaningful rally in sterling. The prospect of a no-deal Brexit and a UK general election could cause sterling to fall further. Could we see parity with the dollar and euro? I think it's possible. I could be wrong-footed by the EU blinking first and agreeing to some changes to the withdrawal agreement that enables it to pass through parliament. Even then, a general election would be likely to follow closely behind. For the time being then, I am happy with the current positioning of the portfolio and am especially pleased that I have a near-8.0 per cent exposure to gold mining.

100-baggers

While I was not trading in July, I walked the West Highland Way, spent a few days in Bruges and read 100 Baggers by Christopher Mayer. Mayer sets out to find the characteristics to look for in a stock that has the potential to go up in value 100 times. Inevitably the examples cited are from the US. Between 1961 and 2014 he lists some 400 companies that have achieved the milestone. It generally takes a long time and a lot of patience to hold a 100-bagger. With a few exceptions, most took 20 years or more. There are a number that took less than 10 years. For instance, buying Home Depot on 31 October 1981 would have given you a 100-bagger in 9.7 years. I am more than happy to find the odd 10-bagger, and this is where this book has some useful pointers. After all, to become a 100-bagger, a stock must first be a 10-bagger.

Mr Mayer believes there is one overriding principle when searching for a potential 100-bagger. He says that one must find companies that are achieving a high return on equity, with the ability to reinvest in the business, and for years to come earn the same high return on investment. He thinks that everything else is ancillary to that principle. One must focus on searching for 100-baggers. Growth is essential (concentrate on sales, earnings and cash per share). One must not pay 'stupid' prices (multiple expansion together with fast growth are the "twin engines of a 100-bagger"). Economic moats are a necessity. Smaller companies are preferred. Owner-operators are preferred, and patience is essential.

In the UK, a great example of a 100-bagger must be JD Sports Fashion (JD). A stock I have failed to buy over the past 20 years (you could have bought it for less than 3p a share in December 1998; it is now 628p). Just 10 years ago, in January 2009, you could have bought it for under 10p a share, and anyone buying before November 2014 has made more than 10 times their capital (excluding dividends). Since 2014 it has not issued any shares, it has grown sales at an average 31 per cent a year, and earnings at 36 per cent a year. It pays a small dividend as it knows that reinvesting its cash at 30 per cent plus returns on capital makes more sense. I failed to buy it because I always thought it looked expensive and I was too late to the party. More recently, Fevertree (FEVR) floated at 134p in 2014 and within four years was nearly a 30-bagger. Growth of 60 per cent a year and a return on equity of over 30 per cent is a heady cocktail. Again, I avoided it as I thought it looked too expensive. A prospective price/earnings (PE) ratio of 42.5 times falling to 37.5 times in 2020 looks expensive, but should it succeed in the vast US market, then maybe the share price has a lot further to go. I see Fundsmith has bought the stock in the past month or so.

It is harder to find these sorts of stories in the UK than in the US. The US is a much larger market and economy, but that does not mean they do not exist. Within the JIC Portfolio, stocks that meet all or some of the required 'principles' are Bioventix (BVXP) and Games Workshop. Other current holdings, such as Avast, Syncona and Scientific Digital Imaging, might in the future. One thing is clear; I need to be more fixated on searching for them. Watch this space!

John Rosier's portfolio (at 31 Jul 2019)