It's an investor's dream: A stock with the potential to double in price.
Finding these stock market gems before they double is difficult but not impossible. According to data provider Capital IQ, there are almost 6,700 stocks that trade on major U.S. exchanges, and less than 100, or 1.4%, have doubled in the past year.
Still, this rare species is worth hunting. BusinessWeek asked fund managers and other market experts to pick stocks that could provide 100% returns in the next couple years. Sixteen of their favorites are listed in the accompanying slide show.
It's possible none of the companies will meet their recommenders' highest hopes. Not only are there long odds against any one stock doubling but the market faces rocky conditions amid a tough economy and a persistent financial crisis. Also, the 16 stocks named by our experts include some unproven, volatile names, reflecting the fact that investors hoping for big returns also must take major risks.
Taking those caveats into account, how do our experts recommend you find stocks that could double? Everyone has a different strategy, but all look for ways to outsmart an efficient market.
Mary Lisanti, portfolio manager of the Adams Harkness Small Cap Growth Fund (ASCGX), says young companies in the small-cap segment offer the most opportunity.
For one thing, "nobody knows much about them," she says, giving investors a chance to spot great prospects before the rest of the market sees them. Also, many small companies are growing by exploiting a particular niche. "The good ones have figured out strategies that get them to grow no matter what happens to the economy," says Lisanti, who recommends semiconductor firm Rubicon Technology (RBCN) and Titan Machinery (TITN), a chain of stores selling agricultural and construction equipment.
(All our sources or their funds own the stocks they recommend.)
Many investors crunch the numbers, looking for promising companies trading at discount prices. Robert Auer, who runs the Auer Growth Fund (AUERX), looks for strong revenue and earnings growth paired with a low price-earnings (or p-e) ratio.
He says one of his picks, specialty chemical firm OM Group (OMG), is growing more quickly than Apple (AAPL) but trades at just a fraction of Apple's high p-e.
Consider Stock Movement
But William Van Keulen, of Colorado Springs (Co.) financial adviser Carnick & Co., avoids a strategy focused exclusively on value. "We don't like bottom fishing," he says. Investing in cheap stocks can be "a little bit like catching a falling knife many times, depending on where the economy is going."
Van Keulen also uses technical analysis—the study of a stock's movement in the market—to find his favorite picks, which included software companies Ansys (ANSS) and IHS (IHS).
Richard Sparks of Schaeffer's Investment Research, an expert on technicals, says it's a good sign if market data indicate a lot of skepticism toward a stock. For example, a lot of short interest in a stock—i.e., investors betting the price will fall—can actually help a stock rally quickly if a rising share price forces short sellers to buy back shares.
Sparks' picks, glassmaker Apogee Enterprises (APOG) and Volterra Semiconductor (VLTR), both face a lot of market pessimism, he says.
Of course, when stocks fall out of favor with the market, it's often for good reasons. Thyra Zerhusen, manager of the Aston/Optimum Mid Cap Fund (CHTTX), looks for stocks selling at a discount for bad reasons.
"We look for short-term trouble," Zerhusen says. Her top picks may have "stumbled short term, but it can be corrected." She thinks Chicago Bridge & Iron (CBI) and Jabil Circuit (JBL) could double, proving their doubters wrong.
Despite the risky environment, some believe this is the perfect time to be hunting for stocks with large upside potential. Carnick & Co.'s Van Keulen says he and his colleagues "salivate" over stocks at a time like this. With the broad Standard & Poor's 500-stock index down 10.6% in the past seven months, he sees many stocks trading at reasonable prices.
See the accompanying slide show for the full list of stocks our experts say could double, and for more information on each of the picks.