I could do with some help defining guidelines to pick the next great UK multi-bagger
My largest multi-bagger to date has been Tristel (TSTL), so that share seems as good a place to start. I have already listed ten lessons from owning 10-bagger Tristel:
That blog post lists these lessons:
You will probably have to study companies with imperfect histories and small market caps
You will almost certainly require companies that have a quality product
You will almost certainly require an elevated P/E rerating as other investors become very optimistic
A few quotes from that TSTL blog post on those particular lessons:
The absence of a reliable track record was reflected by the lowly £16m valuation — too small for most investors to bother with… which created the upside potential for anyone enterprising enough to look beyond the shaky headline numbers.
The business carried net cash and was still paying a (smaller) dividend, and therefore was not a complete basketcase.
The results narrative also contained some very enlightening remarks about the company’s lead product:
"During the year, over 1.7 million disinfection procedures were undertaken by Tristel’s proprietary wipe in the 27 countries in which it is commercially available. The Wipes System can fairly be described as having become the principal method of decontamination of nasendoscopes, cardiology and ultrasound probes in those markets it has gained a commercial foothold.”
“proprietary” = competitive advantage, “principal method” = market leading;
The 12x multiple looked very modest for a business with 36% sales growth and upbeat management expectations
Some other thoughts:
TSTL was in transition. Demand for certain products had collapsed and the cross-over to selling the “proprietary” and ‘market leading’ replacement was well underway.
TSTL had just undergone a step-change from loss to profit. The company said at the time of my purchase:
"We expect unaudited pre-tax profit to be no less than £0.6 million for the period, compared to adjusted pre-tax profit of £0.5 million for the full year ended 30 June 2013 and adjusted pre-tax loss of £0.6 million for the same period last year. "
So H2 profit for the preceding year was £1.1m, versus a loss of £0.6m for H1. Clearly something had just happened to right the ship.
Also, international sales in the preceding year had gained 61% to represent 32% of group revenue. That performance indicated TSTL’s growth was not limited to the UK – i.e. successful overseas expansion gives more chance of long-term earning growth and a multi-bagger potential.
There are vague similarities between TSTL and System1 (SYS1), a share I believe can multi-bag!
From this review:
Small: Market cap was £23m at 173p.
Evidence of a worthwhile product: No clear evidence, but previous RNSs had cited ambitious goals and a service validated by a powerful industry partner:
“Over the last two years, we have reshaped much of the business, automated many of our products, generated increasing industry profile and created a management team capable of achieving our goal to become the world leader in predicting advertising effectiveness. There remains much to do, but we believe that we are further ahead than our competitors.”
“On the strength of the industry attention received by AdRatings, we have announced a strategic commercial partnership with ITV, the UK’s largest seller of advertising space, to support its customers in creating ever more innovative and effective advertising”
Lowly valued, but undergoing a promising transition: The pandemic thumped the company, which had followed a few disappointing years as the business transitioned from consultancy work to automated/data services. The P/E looked to have been 8.
Not a basketcase: Net cash of £5.1m and a possible Q2 margin of 16% suggested the financials were in reasonable shape.
Profit turnaround: A Q1 loss of £0.5m has transformed into a Q2 profit of £0.9m.
International acceptance: 70% of revenue was already from outside the UK.
So my rough Really Attractive Multi-Bagger Proposition (RAMP) guidelines are:
Small: Market cap below, say, £50m.
Evidence of a worthwhile product: Is there something special here?
Lowly rated, but undergoing a promising transition: Low P/E belies a business reinvention.
Not a basket case: Low/no risk of funding issues.
Profit turnaround: Have costs reduced to ensure sustained profitability?
International acceptance: Could revenue growth extend well beyond the UK?
A final guideline could be motivated insider. TSTL’s non-exec chairman was a 27% shareholder when I was buying, while two SYS1 executives owned a combined 30%.
Any thoughts? What have I missed? I would welcome any other guideline suggestions!