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Investing in a 100-bagger is the ultimate dream of every investor.
Finding one is rare, but not impossible if you know what to look for.
In today’s article, I’ll teach you how to become a 100-bagger hunter.
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The Power of 100-Baggers
The beautiful thing about investing is that you don’t have to be right often.
Don’t believe me? Let’s build a portfolio together and see how it works.
Imagine we start with $10,000 in 10 different stocks.
That means the total value of our portfolio is $100,000.
Now, fast forward 20 years.
Looking back, it seems we didn’t do our homework properly… 9 of the 10 companies we bought went bankrupt.
But here’s the twist: the one remaining stock became a 100-bagger.
That single investment turned our entire portfolio into $1,000,000.
This means we went from $100,000 to $1,000,000 in just 20 years.
And this while 9 of our stocks went bankrupt.
This is a CAGR of 12.2%.
In other words, this ‘terrible’ portfolio would have outperformed the S&P 500.
That’s the power of 100-baggers.
Let’s dive into how we can find them.
100-Bagger Characteristics
1. High Returns on Invested Capital
A high Return on Invested Capital (ROIC) is the secret to finding 100-bagger stocks.
A company with a high ROIC makes more profit from every dollar it invests.
In other words, it can create a true compounding machine by investing money back into the business.
In an ideal world, this becomes a flywheel:
The business generates cash
It reinvests this cash at attractive rates
As a result, it generates more cash
Which means they have even more cash to reinvest
True compounding machines can follow this loop over and over again.
That’s why you should always look for businesses with a Return on Invested Capital (ROIC) above 15%.
This rule alone can have a great impact.
What’s also interesting? The longer you hold a stock, the more your returns align with the returns of the underlying business.
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2. Cash in over cash out
Capital allocation doesn't need to be complicated.
It's simply how a business spends its money.
There’s a clear distinction between Cash In and Cash Out.
Cash In: The company reinvests money - through acquisitions, R&D, or other growth initiatives
Cash Out: Money goes out of the company - refers to when a business takes money out by paying dividends, repaying debt, or buying back shares