What is Common to Baseball and Investing?

A triple-bagger. We know about baseball, investing, not so much. Nothing warms an investment counselor’s heart more than tripling the value of a stock purchase in a short period of time. One year is a good time-line.

The Graham and Dodd analytics helps with the route map. Their valuations require a net working capital of more than the total market capitalization, meaning the investor receives the remaining assets for free. These include all the fixed assets, the goodwill, patents and technology. Earnings increases need to be more than 7% compounded annually over ten years and no more than a 5% decline in two of those ten years. As well, the earnings yield—the inverse of the price earnings ratio—must exceed the AAA long term bond yield.

Under current market conditions, these metrics provide very limited opportunities. Nevertheless a few do present themselves and when they do a triple-bagger can be in sight.

Domco Industries is an example. In the late 1980s the company produced floor covering from its plant based in Quebec. The Graham and Dodd valuations were excellent in every respect as were the products. On the negative side, the available stock was in short supply, requiring a careful investing program.

Over time a reasonable holding was accumulated. Within six months the stock price started to appreciate and within a year the increase was three fold. A triple-bagger for sure.

Enter a factor not included in the analysis. During that period the Canadian dollar dropped like an osmium balloon resulting in very favourable pricing in one of Domco’s major markets, the US. How much of the price appreciation was the result of currency cannot be determined but one can assume the influence was positive for the stock price.

Can these conditions happen again? An investment counselor looking for a triple-bagger hopes so.