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.
Small-Cap Opportunities
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.)
Bargain Hunting
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.