SuperModels Community
Join the discussion in the MSN Money SuperModels Community.
SuperModels
Recent articles:
• How $200 jeans can help your bottom line, 8/9/2005
• Pinpoint profits with the latest dashboard gadgets, 8/3/2005
• Take aim on two gun makers, 7/20/2005
More...
| | SuperModels
9 long-shot stocks that could double in a year
They're the stocks dreams are made of. So we looked at the traits of companies that doubled over the past year to find those that could rise 100% or more in the next 12 months.
By Jon D. Markman
At this time of the year, when lying on the beach on vacation makes for lazy daydreams, its not uncommon to consider the possibility of hitting it big in stocks.
If youve been investing a while, you realize this is not the same as trying to hit a lottery jackpot. The lottery's about luck. A big stock market win, instead, would combine a little study with foresight, courage and a dash of bravado. Sure, your $10,000 wager on a few low-priced names could blow up and leave you with nothing. But what if your idea actually worked out, and you had an extra 10 grand in your brokerage account in 12 months?
Normally its my job to warn you away from reckless speculation. But just this once Ill be the enabler of your bad conscience. Lets throw caution to the wind and think about what kinds of stocks have the potential to go up 100%, 300% or even more over the next year.
Three categories of doubles
There are at least three types of stocks that could double in the next year:- Low-priced unknowns that already are rising at a strong clip, well below the medias radar.
- Low-priced, well-known companies that have been slammed in the dirt in well-publicized, news-related smack downs.
- Companies of any price or fame that represent good business doing the right things, albeit at a more accelerated pace than their peers.
That last group is the most tantalizing, for we can all imagine that kind of success for our stodgier stocks. So well look for those, while at the same time seeking oddball micro-caps with potential for big success or larger outfits that have suddenly fallen on hard times for reasons that could be reversed before too long.
None of these types of doubles is hugely uncommon. Of the 5,000 stocks in the MSN Money database with market capitalization of at least $50 million and price above $2, 200 -- about 4% -- doubled in the past year. Another 30 tripled. While most are obscure, many are well-known and widely held, such as Apple Computer (AAPL, news, msgs) and homebuilder Toll Brothers (TOL, news, msgs).
Common characteristics
What did most of them have in common a year ago? - A price of $1.50 to $15, a low price-to-sales multiple, above-average revenue growth and rising analyst earnings estimates are good for starters. So is a rise in trading volume, as stocks only rise in value as new suitors emerge to bid hard for shares from current holders.
- They may come from the most humble of industries, such as industrial-valve makers or pig farmers, but theyre more likely to come either from out-of-favor sectors ripe for an upgrade of sentiment or a sector that has been in favor for at least 12 months.
- They dont need earnings, because one of the keys to the success of early buyers is their out-of-consensus belief that earnings growth will arrive in the future. They also dont need any Wall Street analyst coverage, because often these stocks are either too early in their lives to attract interest, or analysts have given up on them. And they dont need low debt levels, since another perception by early buyers might be that a debt restructuring or major pay-down may come soon.
One element that doublers do often share is a set of institutional owners that have a history of finding golden needles in the haystack, such as Royce & Associates, Wasatch Advisors, Heartland Advisors, SAC Capital Management, Wellington Management and Columbia Wanger. They dont need many -- just one or two is enough to validate the idea and get the ball rolling.
Related news and commentary on MSN Money
Lessons from a success story
Before going on, lets take a look at the markets top stock of the past year, NutriSystem (NTRI, news, msgs). Up 730% in the past 12 months, it sells packaged diet systems. Not exactly rocket science. Two years ago its business was in trouble; it was delisted from the Nasdaq and traded in the pink sheets. But new management came in and restructured operations to sell through the Internet, television and independent distributors rather than through company-owned or franchised retail stores.
Risk-taking investors a year ago were buying the stock around $1.25. Since then, the company moved to the American Stock Exchange and then back to the Nasdaq. Management has repeatedly raised earnings and revenue guidance, and trading volume has surged from 259,000 shares a day last year to 535,000 shares a day in the second quarter to 848,000 shares a day last month. Most shares are still held by independent money managers, with no major mutual funds listed as holders as of April 2005. If the story holds up, the price will move higher as the Fidelitys of the world come in. Another double in the next year seems unlikely, however, as its price/sales multiple is already more than 6.5 at a current market cap of $658 million.
Beaten up, bouncing back
So, which companies might double in the next 12 months? I screened the MSN Money database for stocks that are at least 50% lower than their five-year high but are up 25% from their lows, have seen increasing trading volume, trade at a low multiple of sales, have the right type of institutional owners and are in a sector on the upswing.
One that looks promising is Danka Business Systems (DANKY, news, msgs), which leases and distributes business machines. It has a $150 million market cap, a price-to-sales multiple of 0.12 and trades at $2.37. Its down from a one-year high of $4.15, and its most recent earnings report, posted last week, showed that a recent restructuring had led to an improvement in margins and revenue growth and a reduction in expenses. The stock traded at $4.75 as recently as April 2004, and if the resurrection effort continues on its current path, along with a global economic recovery, Danka can get back there again.
| Other companies that fit the profile | | Company | Price | Market Cap | Avg Daily Volume | Industry | | | | | | | Bookham (BKHM, news, msgs) | $3.60 | $121.7 million | 159,700 | Semiconductors | | Beacon Power (BCON, news, msgs) | $3.05 | $133.6 million | 1.55 million | Electric utilities | | Iomega (IOM, news, msgs) | $3.00 | $154.8 million | 319,300 | Data storage | | Tarrant Apparel Group (TAGS, news, msgs) | $3.60 | $104.4 million | 475,800 | Textile -- apparel | | Main Street Restaurant Group (MAIN, news, msgs) | $4.43 | $75.17 million | 120,200 | Restaurants | | Peerless Systems (PRLS, news, msgs) | $3.72 | $61.06 million | 60,900 | Computers | | Overhill Farms (OFI, news, msgs) | $3.55 | $52.86 million | 50,700 | Processed & packaged goods | | New Dragon Asia (NWD, news, msgs) | $1.13 | $50.92 million | 102,700 | Processed & packaged goods |
|
*As of Aug. 8.
Ive been early and wrong on fiber-optics components makers for more than a year, so I have nothing to lose by making Bookham my top pick. Its earnings report last week suggested that business has stabilized and turned around. Revenue shows a sequential and year-over-year increase of 22% and 57%, respectively. Gross margins improved by 19 points. Its liquidity position was enhanced by an asset sale, and pricing and demand among end users such as Nortel Networks (NT, news, msgs) are improving. With a really cheap valuation -- its price/sales multiple is around 0.6, vs. the 1.1 average of its peers -- there are few reasons other than global recession why the stock cant get back to the $6.50-$7 area by the end of 2006.
The likelihood of more than one of these ideas advancing more than 100% in the next 12 months is pretty small. If youd like to propose a few of your own, send mail to jon.markman@gmail.com. Put 2X in the subject field. Candidates must currently trade over $1, have a market capitalization of more than $50 million and trade more than 25,000 shares a day on average. Include the reason for your speculation, and Ill publish the most interesting ideas in a future column.
Fine Print
For one of the screens that I used to look for 2X ideas, click here (youll be asked to download the free MSN Money toolbox first, if you dont have it). For another one, click here. Its already run up quite a bit, but gun maker Smith & Wesson (SWB, news, msgs), which I wrote about here, is also a candidate...The Pentagon has authorized Northrop Grumman (NOC, news, msgs) and General Dynamics (GD, news, msgs) to continue designing the new Navy DD(X) destroyer. I analyzed the importance of the DD(X), to Northrop in particular, in this recent column.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Greenbook Investment Management. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication, Jon Markman did not own or control shares of companies mentioned in this column.
|
