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, Amgen (Nasdaq: AMGN) generates incredible returns on equity. While we don't know whether it could be a 100-bagger over time, we can use the DuPont ROE formula to learn how Amgen generates those incredible returns on equity.
|
Company |
ROE |
Net Margin |
Asset Turnover |
Leverage |
|---|---|---|---|---|
|
Amgen |
21% |
31.2% |
0.38 |
1.79 |
|
Teva Pharmaceutical (Nasdaq: TEVA) |
13.7% |
17.1% |
0.44 |
1.82 |
|
Genzyme (Nasdaq: GENZ) |
(1.1%) |
(1.9%) |
0.43 |
1.39 |
Source: Capital IQ, a division of Standard & Poor's.
With higher margins than Teva and Genzyme, Amgen clearly outshines the competition. Granted, Teva sells generics, which lower its net margin, but we're after the highest return on equity. The DuPont formula, broken out in the table above, shows that Amgen 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 Amgen 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.
