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, pharmacy benefits management company Express Scripts (Nasdaq: ESRX) 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 Express Scripts generates those incredible returns on equity.
|
Company |
ROE |
Net Margin |
Asset Turnover |
Leverage |
|---|---|---|---|---|
|
Express Scripts |
28.9% |
2.7% |
3.41 |
3.16 |
|
Walgreen (NYSE: WAG) |
14% |
3.1% |
2.56 |
1.77 |
|
CVS Caremark (NYSE: CVS) |
10.2% |
3.7% |
1.60 |
1.70 |
Source: Capital IQ, a division of Standard & Poor's.
With higher asset turnover than Walgreen and CVS Caremark, Express Scripts clearly outshines the competition. The DuPont formula, broken out in the table above, shows that Express Scripts uses its production advantage -- high 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 Express Scripts 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.
