One of the main investing principles at Davis Rea Investment Counsel is to hold great businesses for the long-term.

No doubt John O’Connell, Chair, CEO & CIO, and Don Ritchie, President, will be driving that point home in various ways during our live show this Monday at 11am EST.

That got us to thinking about Chris Mayer, Co-Founder & Portfolio Manager of Woodlock House Family Capital, and author of 100-Baggers: Stocks That Return 100-to-1 and How to Find Them.

Long time subscribers will recall we interviewed Chris two years ago (see the link below.)

Mayer also writes a blog and here we feature excerpts of some of his latest investment musings.

The first part discusses Constellation Software, the Canadian growth by acquisition software company, which Mayer owns, and which has hugely rewarded shareholders over the years (see chart below).

Mayer highlights the types of companies Constellation Software buys (134 deals last year) and who may or may not be the serial acquirer’s competition in pursuit of those transactions.

In the next part, Mayer focuses on a case study of Nvidia, another 100-bagger (see chart below), and marvels at a few things that make Nvidia’s accomplishments remarkable.


by Chris Mayer

Constellation Software and Private Competitors

My friends at In Practise (IP) have unveiled a new service they call “Enterprise,” which involves a deep look at companies through an analysis of their competitive position and culture and other factors.

One of the early reports covers Constellation Software.

IP found 34 private vertical market software (VMS) consolidators.

I think some of these will eventually find their way to the public markets.

What’s interesting, though, is how different the companies are that they wind up buying.

IP estimates put Constellation’s typical acquisition at $3 million in median revenue and 0% organic growth acquired at 1x sales earning a return on invested capital (ROIC) of 30%.

Private competitors, by contrast, buy larger companies ($7m in median revenue), growing faster (5-10% organic growth) but they pay more (3-5x) sales and earn an ROIC of just 10%.

But the private buyers also use leverage, often a lot of leverage.

IP sums up the differences in models this way:

“In short, the major difference is that the competitors are private equity-backed (PE-backed), focused on acquiring faster growing VMS, and use leverage to juice return on equity (ROE).”

The models are quite different and makes me think perhaps there isn’t as much competition as it may appear.

There seems to be different ecologies within VMS.

Anecdotally, I have heard private equity buyers say they never run into Constellation.

The private buyers must be knocking up against each other, but Constellation’s willingness to buy such small, unloved companies may still leave it without as much competition as it may seem.

The bigger question is: Are there enough of these minnows out there for the increasingly large whale to swallow.

My research would lead me to answer “Yes.”

There are new companies being created all the time.

Moreover, the universe of VMS has been stretched to include companies that seem more service providers than purely software.

Speaking with ex-Constellation hands, I gather there are over 100,000 companies that Constellation follows as potential targets.

That puts the 134 companies it acquired last year in perspective.

Plus, Mark Leonard and his team may have found another gear: the ability to put large amounts of capital to work in carve-outs (see the Allscripts deal) and the ability to do larger deals in conjunction with a spinoff (see Lumine).

Perhaps more of these deals is what Constellation 2.0 will look like.

(Disclosure: Woodlock House owns shares in Constellation Software, Topicus and Lumine).

For more on In Practise, visit their website here:


I received a package this week – a three-ringed binder documenting a 100-bagger.

Peter O’Keefe, of O’Keefe Stevens Advisory, compiled this work.

He bought the stock in 2013 and last year he got his 100 bagger.

In March of 2013, O’Keefe bought Nvidia (NVDA).

Based in Santa Clara, CA, Nvidia is the inventor of the graphics processing unit, or GPU.

As O’Keefe notes in his memo, Nvidia was the leading developer of 3D graphics and multimedia processing technology used in personal computers.

The stock was $12.50 per share with a market cap of $7.7 billion. (Split-adjusted, that’s a stock price of about $3 today. The stock hit $329 last year.)

Right away, I see two things that are remarkable.

The first is that he bought the stock in 2013… which means, he only had to wait eight years to get 100x, which is an incredible pace.

It’s one of the faster 100 baggers on record.

Most of the 100 baggers I document in my book settle in that 20-25 year range.

I’m not sure what the takeaway here is, except to say that while hunting for 100 baggers does take patience, you can get there faster than you think with some luck.

The second, and more important point, is that market cap: $7.7 billion.

That ain’t small.

And yet. As O’Keefe writes later in the binder where he writes about his personal reflections on getting a 100 bagger:

“It’s almost unbelievable that a $7.7 billion market cap can possibly grow to $770 billion.”

So, if you find a business compounding capital at 25% per year, but it’s got a $10 billion market cap or a $30 billion market cap, I wouldn’t dismiss it.

Instead, really dig in and try to assess how durable those returns are.

How likely is that business going to be able to keep that pace.

Because then it’s just a math problem.

If the business can compound at 25% per year for 20 years, you have your 100 bagger. (Roughly. To be more precise, you’ll have an 86-bagger after 20 years and a 108-bagger after 21 years.)

I’d put much more emphasis on that and less focus on the market cap, per se.

Another point really strikes me as I flip through this book: How we, as investors, can so easily get lost in the weeds.

I had to chuckle at comments O’Keefe makes about small changes in the financials as he goes along.

For example, among the negatives he cites in his first memo is how operating expenses went up 170 basis points because of increased R&D.

We all do this. I do it.

We all write our notes after the quarterly earnings come out and update our models and so on.

But when you step back, you realize how little those things matter.

In NVDA, as with any big winner, you see it in stark relief.

All those little quarterly updates don’t matter very much at all.

Businesses are organic. The numbers fluctuate. They are not machines. We have to allow for some volatility in results.

One of the really interesting sections is where O’Keefe has compiled the Value Line pages for NVDA during its 100x run.

Again, the same message jumps out at me.

All the commentary on individual quarters, the dithering around with pennies and nickels on earnings estimates, the chitchat on the recent stock performance, the macro talk on the economy…

All of it looks pointless with the benefit of time.

O’Keefe also notes the difficult drawdowns.

Nvidia’s stock fell 57% in 2018.

From that low, it would go up nearly 10x in the next three years.

Even from the high, you’d earn 5x your money if you stayed put – and you could’ve done a lot of better if you bought more.

Obvious lesson here and one I don’t mind reiterating again and again:

Nearly all of these 100 baggers suffered big drawdowns – as in more than 50%.

It’s just a fact of investing life, you’re going to suffer through them if you commit yourself to be a long-term owner of businesses through public equities.

Related stories: Principles of Finding 100-Bagger Stocks – Interview with Chris Mayer

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