Getting extremely high returns of 1 in 100 or 1 in 1000 in the short term does happen, but it’s the exception. They are given by luck or certain contexts, which unfortunately cannot be reproduced on a very large scale, says Kelin Metesh, deputy general director of Fondul Proprietatea.

However, there is a little-known book written by Christopher W. Mayer called The 100 Pickpockets.

That is, we are talking about stocks that generate 100 times, that is, from $ 1 they grow to $ 100, and they show us how to find them.

Listen to the Over Coffee PODCAST below or watch the video at the end for the full discussion where we touch on other practical fundamental analysis topics.

What did the author of the book do?

“He looked back at the history of the American market and tried to find common characteristics of those stocks or companies that have increased 100 times. He tried to extract some principles,” Metesh said.

These three principles are:

1. Companies in a growing market with multipliers.

2. Very good return on equity that this company generates for investors

3. How well the management knows how to allocate capital efficiently

What these principles mean in detail

1. All companies that received such a profit grew. They had very high growth in their business.

“We should look at those enterprises that have a very high growth potential in the future. If we look at renewable energy, electric vehicles, etc., this is an area that will grow. This is a business that will grow as an industry and we need to look at those companies in the sector that we believe will benefit the most from this growth,” he said.

It is more difficult to determine, especially if we are new, the ability of this company’s multiplier to grow.

“I will give an example: companies, when they are evaluated, have several indicators price to book (P/B), price per earnings (P/E). I have this indicator in mind because it is the simplest (P/E), that is, the price-to-earnings ratio,” Metesh explained.

What does it mean?

This means that if a company has a net profit of 10 lei and it trades on the market for 100 lei, this indicator is equal to 10.

“The company’s indicators change over time or not, it depends on the industry, the company and so on, but in general they are developing. Some indicators of certain companies or sectors are reduced, that is, they become smaller, and in other areas and other companies, they become larger over time,” he added.

“We want those companies where the indicators become higher. This means that the market values ​​them more. If earlier I was ready to buy a company with a rating of 10, that is, to return the invested money in 10 years, maybe over time the market will say: this company is in a very sexy, in-demand sector, it is ready to pay a P/E of 20,” he explained.

So this combination of finding companies that are growing very well and have the potential to multiply is extremely powerful because we win on two fronts:

1. The side is fundamentally through the company

2. Because the market highly values ​​these companies

Return on equity is also an important metric: the return these companies are able to generate for long-term investors (we had a text on this topic over the weekend, or you can watch the video or PODCAST version to learn more).

3. Another element is: how much can management reinvest this capital at this return on capital that has already been achieved?

“If we look, all companies go through a certain life cycle. They’re born, they’re small, they manage to get the product, they grow, they become mature, and after that, let’s say, the fall begins,” explained Kelin Metesh.

What’s the idea?

“The company manages to grow significantly to be desirable to shareholders and generate very good returns to the extent that it manages to reinvest the money it receives with extremely high returns over the long term. This is very difficult to achieve,” he said.

Why

What happens to a company when you get really good profits? Competition is emerging.

“If a competitor sees that you have a business that generates 30% per year, he also wants to enter there and compete with you. So management’s ability to reinvest that money at a very high rate of return is important because it increases the value of your company significantly over time, and it generates a valuation by investors to give it a higher multiple,” he also revealed to Kaelyn Metz.