In Chris Mayer’s Book “100-Baggers: Stocks That Return 100-to-1 and How to Find Them” Chris distills his findings into a number of important principles. The first and most important principle is to find a business with a high return on capital and the ability to reinvest that high return on capital repeatedly for years and years. Every other principle is ancillary to this one and are listed below:
You Have to Look for Them
Growth, Growth and More Growth
Lower Multiples Preferred
Economic Moats Are a Necessity
Smaller Companies Preferred
Owner-Operators Preferred
You Need Time
You Need a Really Good Filter
Luck Helps
You Should Be a Reluctant Seller
’m not going to go through these one at a time, but rather I suggest you endorse the author and read this book.
To demonstrate my application of these principles, take for instance my first position ZIGExN (Jigen). This business owns controlling stake in subsidiaries all operating in a B2B2C manner. That is, it acts as the intermediary between a business and consumer. It does this through what they call ‘EX Sites’ which refer to matching/aggregation websites that provide a platform for clients such as travel agencies, real estate agents and human resources to advertise their offerings in an efficient manner of which Jigen receives a fee.
This basic concept of the business is straightforward one and repeatable across various industries, allowing them to diversify their revenue streams to minimise the variability of revenue, a process which they are currently undertaking. In 2008 the business was 100% Recruitment based, and now it is ~50-60% with the balance attributable to ~25-30% Real Estate and 15-20% Lifestyle based revenue.
The business model enables a network effect that can be accelerated through M&A by the Founder and CEO Joe Hirao (6 - Owner-Operators Preferred). First of all, this network effect (4 - Economic Moats are a necessity) evolves over time through the cycle of increasing the capacity and conversion value of end-point users. The business has a positive growth spiral:
Increase In Users
User data used to improve matching technology
Increase of the unit/conversion price
Advertising using gross profits to increase the flow of 1. Users
After this process, Jigen still remains profitable with a 20%+ Profit Margin. These are allocated efficiently by Hirao depending on his opportunity set. This flexible approach to capital allocation is highly valued and the large insider ownership is an incentive to maximise shareholder value over time. The current 5 year management plan indicates a target of 25% p.a. Operating profit growth (2 - Growth, Growth and More Growth) and 25% ROE. This is half of their historical rates of return. You can see a noticeable deterioration of the velocity of business growth due to declining rates of reinvestment which I believe is the reason for the rapid deterioration in valuation and margins.
That being said, the market that Jigen operates in is extremely large and Joe’s priority is not only to increase market share, but the size of the addressable market as well. Being internet advertising there is an asymmetric portion of profits pooled in this industry and as such the relatively small size of Jigen’s $13.2b Yen in Sales (~180m AUD) in an addressable market of well over $2.5 trillion yen in domestic Japan alone without clear dominant competitors provides a runway for continued growth, both organically and through acquisitive expansion (5 - Smaller Companies Preferred).
“In our office we often say, “How wide and how long is the runway?”
~ Chuck Akre
However, that being said a EV/EBITDA of ~7.5x (3 - Lower Multiples Preferred) and ~30% of sales in unallocated net cash i believe that Jigen is being priced for no growth at all in a business that has an excellent allocator and a model that lends itself to low/no friction to synergistic growth over time. It is this type of business I view to be a low risk over time as there is an extremely large demand pool of profits to draw from over time, leading to a lower risk of competitive pressure and freedom for a well incentivised owner to execute over time.