Everyone loves the idea of buying stocks that double in price. But how do you spot them? Here are 10 quick pointers:
1. Out of favour
A stock that's out of favour – hated even – is potentially an investor's most rewarding opportunity.
Intelligent Investor recommended News Corp in July 2011 at the height of the phone-hacking scandal when the price had fallen to $14.58. Since then it's more than doubled.
What most investors missed was the fact that the company's newspaper businesses were insignificant compared with its pay TV and movie operations, which were travelling along nicely. It was the quintessential out-of-favour stock.
2. Hidden progress
Computershare, the world's largest share registry, last year completed the purchase of BNY Mellon. As a result, it now controls about 60 per cent of the US registry market. That has huge potential to deliver cost savings and higher earnings when corporate activity recovers. The company has made hidden progress but the market is yet to catch up.
3. New technology
Sirtex owns an innovative treatment for liver cancer that costs $US14,000 ($13,500) per dose. When Intelligent Investor recommended it as a "speculative buy" in November 2010 at a price of $5.90, the company was involved in litigation with a major shareholder, directors owned very few shares and profitability was declining.
But new clinical trials were underway that could increase the market size for Sirtex's product tenfold.
The results of the trials aren't due until next year but the share price has almost doubled since late 2010 in anticipation of the potential financial rewards.
4. Investment in R&D
In his book, Common Stocks and Uncommon Profits, Philip A. Fisher suggests that the best companies to buy are those investing heavily in research and development to provide future profits.
After recommending blood products manufacturer CSL in March 2011 at $33.97, its share price surpassed $60 recently. This year the company will invest more than $400 million in research and development – more than its entire revenue in 1997.
5. Industry tailwinds
Air travel tends to grow at about twice GDP growth. That's a lovely tailwind for an airport business (less so for airlines where the benefits get competed away). At the bottom of the market in 2009, Sydney Airport stock hit a low of $1.45. With passenger growth recovering, the stock price is now $3.16 and it has paid handsome distributions along the way.
6. Changes to industry structure
The internet has all but destroyed traditional newspaper companies. In their place have arisen online classifieds sites such as Realestate.com.au, Carsales and Seek. All trade at multiples of their float price while companies such as Fairfax struggle. The structural shift has destroyed some businesses and created others.
When owner-managers put their money on the line, pay close attention. Investors in four-wheel-drive accessories manufacturer ARB Corporation and Flight Centre would understand the benefits. Stocks that double tend to have exceptional management with a vested interest in maximising the value of their shareholding.
8. Insider buying
Directors buying stock is another indicator of a potentially cheap stock. Flight Centre's Graham Turner last purchased shares on market at a price of $3.84 on March 16, 2009. Now, the company's share price is well over $30. Directors know their businesses well. It pays to watch their activity.
9. Financial strength
The strong financial position of serviced office provider Servcorp meant it could purchase cheap leases during the GFC and reap the benefits when the market recovered. That's one of the reasons why the stock has increased more than 40 per cent since the middle of last year.
10. Unrecognised by the market
When the stock price fell below $20 a year-and-a-half ago, complaints about Macquarie Group's return on equity failed to recognise the value of its large capital cushion, and investors ignored its more stable businesses such as funds management, which were growing, and supported a decent dividend. The market is now catching on, with its share price more than doubling since the 2009 market lows.
Genuinely independent thinking and a thorough understanding of the facts increase your chances of buying stocks that will double in price. Next time you're considering a stock purchase, use this checklist.
The more factors you can tick off, the greater the chance of your next purchase doubling in price.
This article contains general investment advice only (under AFSL 282288).
Nathan Bell is the Research Director at Intelligent Investor Share Advisor, shares.intelligentinvestor.com.au.