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Every week, Kyle Caldwell and guests take a look at how the biggest stories and emerging trends could affect your investments, with practical tips and ideas to help you navigate your way through. Join the conversation, tell us what you want us to talk about or send us a question to OTM@ii.co.uk. Visit www.ii.co.uk for more investment insight and ideas.
Hello, and welcome to On The Money, a weekly look how to get the best out of your savings and investments. In this episode, we're gonna be covering how investors can attempt to find companies with explosive growth prospects that could potentially achieve the rare feat of becoming a multibagger stock, which is when a company achieves a share price gain of at least 300% or 400%. Some companies achieve the even rarer accolades of becoming a 10 bagger stock. As it implies, a 10 bagger describes an investment that has the ability to or has achieved a tenfold increase, which is a 900% gain. It was coined by Peter Lynch, one of the best known investment gurus of the twentieth century.
Kyle Caldwell:The 10 bagger term is a baseball analogy. Joining me to discuss this topic is Gene Roach, full manager of Investment Trust Schroeder UK MidCap Fund. Gene, it's great to have you on the podcast today. Now, Gene, as I've just mentioned, it is rare that a share becomes a 10 bagger, but it's not impossible. There are various examples of companies that have become multibaggers or 10 baggers.
Kyle Caldwell:Now in the pursuit of a potential multibagger, what are the key ingredients or attributes that you would look for?
Jean Roche:Yes. It is rare, and that's why I'm very proud to say that it's actually more probable, according to our research, in The UK than it is in The US to find a multibagger, let's just say multibagger, not sort of a stick rigidly with 10 baggers, so multiple times return of your original investment. So our analysis published a few years ago and refreshed last year showed that over the previous twenty one years, you were had more of a chance of stumbling across a multibagger in The UK than in The US. Now that was obviously very irritating for some of my US colleagues when I unearthed that together with my colleague, James Goodman. And so to just to give you some of the what we found was when we looked at, over the last twenty one years, the return of, 20, 2200%, so that's 21 bagger.
Jean Roche:We we decided to look at that. We saw that, 3.6% of the investable set would get you to, a multibagger in The US, but 3.8% of that investable set, so it had to have a minimum market cap of 150,000,000. 3.8% of that set, was a multibagger in The UK, so therefore, higher probability of stumbling across a multibagger in The UK than in The US. So it depends on the periods you look at, but, you know, fairly consistently, we were we were finding that. So, so you were asking about the key, ingredients or attributes that we look for.
Jean Roche:So what we did was we turned that analysis on its head and then looked at the attributes of those UK companies. You know, what was it they were doing that was achieving, managing to get them to to this sort of status? So companies such as Games Workshop or Cranwick, for example, the food manufacturer. A key finding was around issuing shares. Multibiggers don't really do it, and that's what we found.
Jean Roche:They don't issue if they issue shares, they don't issue very many because issuing equity is damaging for returns more generally. And they don't have to issue shares because they're able to generate cash internally, and then, crucially, they use that for investments. But, of course, they must be profitable, in order to be generating that cash in the first place. So, you know, you want these company models where they're profitable, and all the other good things you would expect, like strong management, and in a sector where supply can't keep up with demand, and they have pricing power. But I think the key factor to focus on really is that generating that cash, the cash returns, and then investing that.
Kyle Caldwell:And is there a minimum threshold you're applying to be a multibagger? Is it gonna go up four or five times?
Jean Roche:Yes. I think that's a really good question, actually, because I was discussing this with the family last night. They were absolutely delighted to, you know, my two sons, both under 15. But I they asked me what a multibagger was, and I said, well, if you think about it like a multistory car park, if it has two floors, is it a multistory car park? If it has three store three floors, could you say?
Jean Roche:So if it's three x, maybe four x, I think that's kinda what people have in their mind. But, also, what I did find was some some of the literature says it has to be the capital appreciation only. Don't doesn't count the dividends, but, actually, I think it must count the dividends because that's what the shareholder experiences. They can see, and then it's whether they decide to take those dividends or reinvest them. But if you decide they're gonna reinvest them into shares, it's that that crucially gives you that exponential return over and above, and actually, we really see that in midcaps because they're at this sweet spot in their growth stage.
Jean Roche:It's where they can you get the capital appreciation and then the dividend on top. So I'd say I mean, what do you think? I'd say it needs to be three x, four x before you're talk, or maybe five x. But I think it's a it's a it's a healthy debate, but the the multistory car park worked well as an argument in our house.
Kyle Caldwell:You mentioned Games Workshop and Transwick. In ten, fifteen years ago, these would be these would have been less familiar names with investors. So do investors need to look outside the bigger names in the 4100 to try and identify companies with potentially greater growth prospects?
Jean Roche:Yeah. So I think that's it's intuitive, really, isn't it? You know, if you, start with a 10,000,000,000 company, let's say, for it to be a 10 bagger, if we go back to just 10 baggers versus, you know, a a £10,000 or a, you know, a 1,000,000 market cap company, you kind of think if you start with that smaller company, then it's more likely that you can, you know, increase by that multiple. So that's a good place to start, you know, if we accept that normally 10,000,000,000 companies are not going to 10 x. So then we look at why would they start to, you know, increase in so if multiple expansion, and how do they get multiple expansion?
Jean Roche:Because more people start to know the name. As it starts to prove itself, more people get interested in it. It's under researched in the beginning, so that's where the opportunity lies. So, obviously, small and mid caps tend to be less well known and particularly less well known by international investors. So as international investors start to get on board, and often we find that's the sweet spot, you see the first couple of American investors appear on the register.
Jean Roche:And I remember back in the day, I covered, ASOS, sort of twenty years ago, and in its time, that was a multibagger, over a certain period. And when the first phone calls started to come from, say, West Coast hedge funds about the stock, then you start thinking, well, now you might see the multiple expansion. So if you get together with the top line, the revenue growing, together with the margin expansion, together with multiple expansion. So say the top line doubles, the margin doubles, the multiple doubles, there, you've got an eight bagger there. So and it depends on the amount of time you think that might happen.
Jean Roche:I think that's the the real kicker is when you start to get the multiple expansion because more people start to know it.
Kyle Caldwell:And are there certain sectors or industries that you would highlight that have potentially higher growth opportunities?
Jean Roche:Yeah. Well, it's counterintuitive in some cases. Some, like Cranzwick, for example, you wouldn't think food manufacturing would be your ultimate sort of multibagger hunting ground because, you know, you would think high return on equity sectors, high return on invested capital, low capital intensity. Well, of course, Cranzwick, which does pork products and chicken, you know, they actually generate lots of cash internally, tick the box, don't issue shares, but, you know, they do high level of capital investment is required there, but it's the they actually make that investment, and then they get the return on that, and then they're also able to return cash on top of that shareholders in the form of dividends. So that's a sector where you wouldn't expect to find it, and that's a stock that's actually a 200 bagger plus, so you're very interesting.
Jean Roche:So that's maybe an anomaly. You wouldn't traditionally look in that sector. You'd look in sectors like industrials, consumer discretionary, health care, financials, typically. So they would also, be lower capital investment required generally and and, you know, double digit, profit margins typically. So but, you you know, you can find them in all sorts of sectors, and that's sort of the interest and the and the, the joy in researching these things, when you get that glorious, excellent management team on top of the right sector and the lack of supply of whatever it is they're doing.
Jean Roche:And in the case of Cranzwick, you've got the the lack of people being able to do something complex, which is food manufacturing, handling raw meat, and and and being able to do that well in a in a consistent way.
Kyle Caldwell:And could you highlight examples within, show the UK Mid Cup of being multibaggers over the years?
Jean Roche:You know, I thought you'd never ask. But, yeah, I've already mentioned Games Workshop and Cranzwick, but I think others that, you know, depending on, again, when when you we've done the analysis, all the others that have popped up on our screen that have been multibaggers, we can, you know, look in a alphabetical way, if you like. So we would have had Ashtead, which is equipment rental, which obviously sadly has gone to The US now. Computer center, generating very high levels of cash, paying it back in in dividends and special, and then reinvesting that cash. You've got Diploma now in the FTSE hundreds.
Jean Roche:Grainger as well, not a multibagger if you cut the data currently, but when we did it two years ago, it was, and that, rents out accommodation to people, high quality accommodation, private rental sector, and, as you know, shortage of accommodation in The UK and strong management team there. And Savills as well. So, you know, they're, you know, household or at least broadly recognizable names, but one of the things is, you know, they arrived. They became multibaggers, but what you then need to do is look for your next multibagger, which is why it's quite a useful discipline, and we do that in the trust that I run called Schroeder UK MidCap PLC. What we do is and and the philosophy within the team together with Andy Bruff and James Goodman is that we sell a midcap when it goes into the FTSE 100 for these strategies, and then we look for ideally the next multibagger at the lower end of the market cap spectrum, which is hopefully not very well known, going back to what we said earlier about starting small, because a lot of the multibaggers, if you get sort of the printed lists of stocks in the in the nineties, the small caps, you'll see some of those bagger names.
Jean Roche:Mean, Croda, for example, is a chemicals company not currently doing that well, but that was was flagging very strongly as a multi bagger a couple of years ago, it's it's had a more difficult time recently. But you would have seen some of these sort of twinkling away in the small cap. So that's why it's really great in the team that we have a small cap angle as well. So, you know, we look at things coming up from small cap and then waiting for them to move into mid cap, and we we invest in them then in our mid cap funds. And then and and then we'll we'll move on from them when they make it into the footy 100, hopefully.
Kyle Caldwell:You've mentioned your sell discipline. If a company enters the footy 100, you'd sell. Prior to that, if a if a company's having a good run up in share price, how do you decide whether to take some profits or keep on running it as a winner?
Jean Roche:Yes. I think that is one of the key disciplines, remembering to sell, not falling in love with a share, but, of course, what we find is we didn't buy the position all at once. We went into it slowly. We didn't suddenly put 4% into the fund because often, these stocks are they move to become three, four, four and a half percent positions in the fund, So it makes sense to top slice. You know, we look at peg ratios particularly.
Jean Roche:So when the PE divided by the three year forward growth, forecast in earnings per share is looking a bit out of whack with where it's been previously perhaps. That might be time to do a bit of top slicing. And as I mentioned, 99 times out of a 100, if it goes into the FTSE hundred, we'll sell it all. And, actually, by then, it having to slightly contradict what I just said, because it's going into the FTSE hundred, it probably has good enough liquidity at that point that you can actually sell it all, whereas when you were buying it in the early days, hopefully right down in the bottom of the mid $2.50 opportunity set, it wouldn't have been possible to buy that position all at once. So, you know, you can actually sell quite quickly when it's being promoted.
Jean Roche:It's widely anticipated in many cases as well, but probably before then, you'd have been averaging down, you know, selling not averaging down, but selling down, top sizing it. Yeah.
Kyle Caldwell:And your decision to do that. So if a midsized company becomes a large company, then it's the 41 hundreds, your decision to sell, that's an internal decision because I I do know that other funds and investment trusts, smaller company funds, I've I have often seen certain holdings enter the 4,100, and then they're still in the top 10 holdings.
Jean Roche:Yes. Yeah. And they and they can occasionally keep going, but we generally find, I think, one company where we have given example in the past is, say, for example, Fraser's, which would have gone into the FTSE hundred at £8.50, and then come out of there and, you know, traded around down as low as below £3, it it has often been the right thing to do, and the company formerly known as Royal Mail, then IDS, now obviously has been taken out. That one got promoted into the FTSE one hundred twice and fell out twice, and both times it was actually a good trade to do, to buy it when it fell out and sell it when it went back in. So, generally, we find that it also forces us to look for new ideas down at that small cap sweet spot part, and it might be you end up buying two new ideas to replace that one idea that went out through the sunroof, shall we say, and we're always waiting, very happy to have another look if something that's got promoted comes back to say hi in the mid two fifty again.
Jean Roche:So yeah. But I I think, you know, sometimes stocks keep on going, and I'm sure there'll be people who say, I would hold on to them. And I think, as you would expect, that is a is a live debate, and you will. If you have a little look, you'll probably see a few games workshop shares still lingering, which is now in the FTSE 100, of course, in this fund. So I did say 99 out of a 100.
Kyle Caldwell:Wanted to next turn my attention to your portfolio at the moment. Could you highlight where your funds and the best opportunities are present? Are there any sectors that you pick out or types of companies that you have in the investment trust? And could you run through some recent portfolio activity over the past couple of months?
Jean Roche:Yeah. So I should probably mention, and I think it's been highlighted before, you know, where we see inexpensive technology stocks. So they're disguised as defense stocks, but they're actually, in our view, inexpensive technology stocks, and that's where we have been fairly, you know, over indexed, recently. We had Babcock that got promoted into the FTSE hundreds, so we don't have that anymore. But at one point, 12% of the fund was in defense, and actually, I went to DSCI yesterday, which is the biggest defense showcase in Europe, and that was that's ongoing, out in the Excel Center right now.
Jean Roche:But you can really see that that is where in a in an environment where growth is low, and, of course, The UK has higher growth than many other g seven countries right now, but in an environment where generally growth is hard to come by, that is a sector where we are going to see growth. And, of course, it's important to to lean into, you know, certain stories within that. And you'll see positions like Kemring in the portfolio. And we also hold Kinetic, which generates a lot of cash too. And you can also see in IT services as well that that, you know, in ex an inexpensive technology stock.
Jean Roche:Again, I'd class Kynos as one of those, and they do work Workday services and solutions. And there, we had the CEO come back into the business, and that has we've really seen the fruits of that as it as it moves to recovery. So, you know, in that sort of in inexpensive tech stocks bucket, that's where I put some of the defense names and some of the IT services. And in terms of recent activity, adding to the, adding to that that name, Kainos, for example. And then recently, you know, activity is then pushed by, for example, bids.
Jean Roche:And as you know, there's been a huge amount of bid activity in mid cap lands just really highlighting the fact that The US strategics, The US financials are getting really interested because they really see the value inherent in these UK companies where multiples have been driven down by flows out of funds, really. So we've had a bid for Spectris, the scientific instruments company, at, nearly 90% premium to the to the, resting price. And also for JustGroup, their financials, the bulk purchase annuity specialist. And so then, as you would expect, we're looking for replacement ideas for those, so maybe adding to existing positions in, I think, world class industrials such as body coat, which does high pressure, engineering where it presses pieces of metal down harder to make them work better for longer and be have higher fidelity in machine machinery. I hope you're not I hope you're not an engineer.
Jean Roche:You could probably explain it better than me if you are. And so, you you know, what what we might be doing is sort of adding some of those existing positions industrials. And then with Just looking for a Just group going out looking for a replacement in that area in the insurance arena, so, you know, sort of replacing that industrials exposure with further industrials exposure and then replacing the Just group to have that, bid as well with replacement ideas in the in the same sector. So, and I had been I think it's fair to say I would have highlighted, you know, three or four months ago if we'd been sitting here. I probably would have said I was leaning more into UK names.
Jean Roche:I would say now probably more into international names, because some of The UK names did run a bit. Some some we've seen some warning signs, some sectors starting to look a little bit more shaky on the domestic side, and you have to be very careful with, for example, which part of the consumer discretionary you lean into, so which consumer you're exposing yourself to. I mean, for example, Currys have had a really good run of it, but they are exposed to the AI super cycle in that they've got the highest market share of AI enabled laptops in The UK. Do you have one yet?
Kyle Caldwell:I don't actually, no.
Jean Roche:Ugh. You've gotta get one. But, you know, that, so that's kinda something, and that together with you may have heard some of their ads. They're very amusing ads. I don't know if they're being targeted at me particularly, but they have some very good marketing out at the moment also, and, you know, you've had the competition just fall by the wayside.
Jean Roche:Gone are the days of the, you know, where you'd go to John Lewis and get them to explain your new TV to you. That just doesn't happen anymore, so it's wide open for Curry's. And they also let my boys play on their, on all their gaming, you know, sit in the gaming chairs and play with all their, various tech kits. So I think I think the store experience is, is strong there as well, and people are buying, refreshing that kitchen equipment, consumer tech, having bought new stuff in 2020 during COVID. After five years of eating your lunch over a laptop, it's not very nice, so maybe you wanna buy another one.
Kyle Caldwell:And finally, could you provide an outlook for the area of the market that you invest in? I was hoping you could name one reason to be cheerful and one reason to be fearful.
Jean Roche:You're limiting me to one of each. Okay. So just to recap the area of the market I invest in, so we focus on the mid two fifty, which is the 250 companies below the FTSE 100, excluding investment trusts. So that's that's an index which then gets you to about a 170 companies. So, so that's the area that I'm I'm very focused on.
Jean Roche:Reasons to be fearful. I think, you know, the Daily Mail and and others will cover many, many reasons why you can be fearful, but the main reason to be fearful is fearful of overpaying for a stock because that is what destroys returns, and that's the key. Actually, going back to the multibag, as I should have said earlier, the price you get in at, you know, there are timing, very much timing disciplines with getting the multibagger equation right, so that that initial valuation point. So that, you know, the fear of overpaying, and I think PEG works well for that. What am I paying for this growth?
Jean Roche:Because it might be a great story, but, you know, the the the valuation isn't gonna go to go to the sky. So I think what keeps me cheerful, I think I I I need to say this as a, quickly as one sentence so you won't notice. I have a few. So knowing individual stocks gives me great pleasure. You know, I think I talked about Currys at Fairbit, for example.
Jean Roche:Knowing management teams, having a fierce attention to accounting detail alongside the team. There's, you know, a lot of CFAs and accounting people on our on our desk, and, you know, I think that is what makes me cheerful because I can always find a data release with some positives. You know? For example, we're one of the fastest growing nations in the g seven by, you know, point 1% or something, but, you know, you'll always find another piece of data to contradict that, and that's why you classically see those arguments in governments where one politician says one thing, you know, unemployment's come down and unemployment's gone up under the labor government. Well, you could actually argue the other way around as well depending on how you cut the data.
Jean Roche:So, you know, and we're winning the least ugly competition with France, again, but, I'm not gonna cling to that. It's about the individual stocks. And so what makes me cheerful is meeting management teams, alone or with colleagues, doing the work, and then getting it right. Getting it at the right price is the cherry on top.
Kyle Caldwell:So that's all we have time for for today. My thanks to Gene, and thank you for listening to this episode of On the Money. If you enjoyed it, please follow the show in your podcast app and do spread the word. If you get a chance, please leave us a review or a rating in your podcast app too. We love to hear from you.
Kyle Caldwell:You can get in touch by emailing ocm@ii.co.uk. And in the meantime, you can find more information and practical pointers on how to get the most out of your investments on the Interact Investor website, and I'll see you next week.