Could Alcon Be a Multibagger?

Investor Chuck Akre recently shared his secret to stock success with a group of Fools: He simply looks for 100-baggers. After we politely snickered, Chuck explained that while he hasn’t actually found a 100-bagger yet, he does believe that companies that can compound shareholder capital at high rates have the best chance of generating phenomenal returns over the long haul.

As you'll see below, Alcon (NYSE: ACL  ) generates incredible returns on equity (ROE). While we don't know whether it could be a 100-bagger over time, we can use the DuPont ROE formula to learn how Alcon generates those incredible returns on equity:

Company

ROE

Net Margin

Asset Turnover

Leverage

Alcon

41.0%

31.9%

0.8

1.4

Synergetics USA (Nasdaq: SURG  )

11.9%

9.1%

0.7

1.7

STAAR Surgical (Nasdaq: STAA  )

(18.7%)

(2.0%)

2.1

1.7

Source: Capital IQ, a division of Standard & Poor's.

With higher margins than Synergetics USA and STAAR Surgical, Alcon clearly outshines the competition. The DuPont formula, broken out in the table above, shows that Alcon uses its consumer advantage -- high margins, low asset turnover, and reasonable leverage -- to generate very attractive returns on equity for shareholders.

The Foolish bottom line
I thought Chuck was a little crazy to pursue only 100-baggers. Then again, perhaps he's crazy like a fox. If a company like Alcon can generate incredible returns on equity over time, the market will likely pay higher and higher prices for a piece of its greatness. True, we might have to settle for a two- or three-bagger, instead of a 100-bagger … but maybe that was Chuck's point all along.

In true Warren Buffett (or Chuck Akre) fashion, the guys at Motley Fool Inside Value love to find companies with durable competitive advantages. Discover everything they've turned up so far with a 30-day free trial.

Million Dollar Portfolio associate advisor David Meier does not own shares of any of the companies mentioned. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (1)

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  • Report this Comment On August 25, 2010, at 10:25 PM, MotleyFoolster wrote:

    You HAVE to be KIDDING me. Has the motley fool SERIOUSLY wrote an article about Alcon being a potential 100 bagger????!? THEY ARE GOING TO BE BOUGHT OUT BY NOVARTIS YOU DUMMY! For LESS THAN the current share price! At the current offer of 2.8 NVS shares per Alcon share, the offer is $141 vs. Alcon's share price of $160. Sure, the offer can be raised up to $180, but either way, this is NO POTENTIAL 100 BAGGER!!! God, the motley fool is really, REALLY, dumb. A 2 second google search would give better information that this piece of toilet paper article. Who in their right minds would pay the exorbitant prices the motley foolers are asking for their newsletters. For more advice like this?

  • Report this Comment On August 26, 2010, at 12:31 PM, stuartcreekfarms wrote:

    Agree, the most ill-informed and stupidest article I have ever seen about a stock.

    Synergetics and STAAR are not even close to competing with Alcon. The Alcon competition is Bausch & Lomb and Abbott Medical Optics.

    You really ought to take this piece of drek down.

  • Report this Comment On September 12, 2010, at 3:40 PM, SUPERMANSTOCKS wrote:

    This article makes no sense!

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