I have spent a lot of time the past few days thinking about how to find 100 to 1 winners in the stock market (see yesterday's post on this). I confess that Thomas Phelps' book, 100 to 1 in the Stock Market, had a profound effect on me. I have always taken a long view of stocks and have a much longer holding period than anyone else I know. However the idea of building multigenerational wealth by holding stocks basically forever is not something I have spent a lot of time thinking about. The book really reinforces the potential wealth impact of buying right and sitting tight for decades at a time. After some thought and discussion, here are the areas that I consider the best hunting grounds for 100 to 1 winners over your lifetime.
The first will come as no surprise to you. It's the small banks. Before you dismiss this as Melvin forcing a square rod into a round hole, let's consider the fact that Wells Fargo (WFC), M&T Bank (MTB) and Bank of the Ozarks (OZRK) have all been huge winners over the last 40 years. They became so through acquisition -- and those owners of the little banks that the big guys bought that held onto their shares have built an incredible amount of wealth. It took a lot of fortitude to hold the stocks all these years, but those that did have been rewarded.
Focusing on smaller banks in states that are projected to grow over the next several decades, like California, Florida and North Carolina, is a solid plan for investors hoping to participate in a multi-decade rollup of banks. The community banks will catch the eye of smaller regionals, who will then become the target of a larger regional -- and on up the ladder. The hard part will be holding the acquiring bank's shares all the way through the process. Banks like ASB Bancorp (ASBB), Banc of California (BANC) and Atlantic Coast Financial (ACFC) strike me a good way to get started on the journey.
Cybersecurity would seem to me to be a no brainer, given the valuation of most of the stocks in the sector. Stocks like Check Point Software (CHKP), Palo Alto Networks (PANW) and Fortinet (FTNT) all trade at healthy multiples right now. Since buying right is a huge part of the equation, you may have to wait for a bear market environment to buy these stocks. Life will continue to move online and into the cloud, and attacks from criminals and our global adversaries will become more frequent in the future, so a ton of money will be spent in this area -- and it will be permanent spending. I do like Kratos Defense & Security Solutions (KTOS) in this area, as they have a division that works in cyber defense and warfare. Unisys (UIS) is a pick, here, as well. They have a cybersecurity product that is well reviewed, and will be marketed to banks with what I think will be a great deal of success.
Alternative energy has to be on the list, as that's the way the world is moving. But I have a tough time coming up with companies that I think will make the whole 40-year ride. I tend to agree with Bill Gates that we need a breakthrough technology before alternative energy becomes cost effective. I watch the space carefully, but until we get a breakthrough in storage and transmission I do not see a long-term play in the space. Some of the companies that make the carbon fiber used in windmills are a possible consideration, like Hexcel (HXL), but they are not cheap enough to buy right at the moment. I am not convinced that the 100-to-1 stocks in this space have been founded yet.
Pollution control is another industry that I think will be a growth leader over the next 3 to 4 decades. Global population is growing, and I see no reason it will not continue to do so. More people means mean trash, more carbon emissions and more water pollution. CECO Environmental (CECE) stands out as a company that is growing book value at a rate that can produce huge long-term winners.
Growing populations will also increase the demand for clean water. Companies that can help find, produce and deliver clean water should see the type of long-term growth that can produce 100-to-1 winners. Companies like Layne Christensen (LAYN), Northwest Pipe (NWPX) and Consolidated Water Company (CWCO) would seem to be likely candidates for a multi-decade portfolio of water-related stocks.
Thomas Phelps' book is one of the more thought provoking books I have read in years. Sitting down and thinking in terms of investing for decades in companies that should reap the benefits of social and demographic trends capable of producing these types of gains is intellectually -- and perhaps ultimately, financially -- very rewarding. I highly recommend that you read the book and conduct the thought exercise.