These Stocks Can Easily Double Your Money

Published in Company Comment on 10 June 2009

When hunting for the big stock market winners of the future, there is only one place to look.

Believe it or not, some investors were able to boast about their 2008 stock returns.

Who are these people, you ask? Investors in these top-performing stocks of 2008:

Company% Increase 2008Market Cap on 1 Jan 2008
Savile Group (LSE: SAVG)146%£2 million
Ramco Energy (LSE: ROS)127%£9.5 million
Telecom Plus (LSE: TEP)65%£128 million
Lo-Q (LSE: LOQ)55%£3.8 million
Abcam (LSE: ABC)53%£115 million

Notice anything about those companies? They're small. A couple of them are very small. Now compare their performance to the top 5 performers of the FTSE 100 Index:

Company% Increase 2008
Rangold Resources (LSE: RRS)60%
Astrazeneca (LSE: AZN)30%
Amlin (LSE: AML)20%
Compass Group (LSE: CPG)12%
Experian (LSE: EXPN)9%

While the latter is nothing to sneeze at, particularly given that the FTSE 100 slumped 31% in 2008, wouldn't you rather have the former?

Where You'll Find The Double-Baggers

The tendency of small caps to outperform their large cap brethren isn't just a down-market happenstance -- it happens most years. As master investor Jim Slater famously said "Elephants don't gallop".

In any market, the stock with the most potential for outsized returns (stocks that are going to double, triple, or even increase your investment tenfold) are not found among large caps, but rather among shares that are:

  • ignored;
  • obscure; and
  • very small.

Why? Because the market's greatest inefficiencies (and, thereby, greatest opportunities) lie hidden among the investments that City analysts and institutional investors shun only because of their size.

Starting Today

Investing in small-cap shares makes many people nervous -- and today's market volatility is sending many people into the arms of stable, financially pristine large-cap shares. Which makes now an even better time to buy up those oversold small caps.

But not all small companies are equal. You want to make sure you buy small companies that have a rock-solid balance sheet and a solid business model. Both these factors ensure that the company will be around five to 10 years from now, giving it plenty of time to double, triple, or increase tenfold in size.

At our Champion Shares premium stock picking service, these are precisely the kinds of shares Chief Analyst Maynard Paton is recommending right now. In fact, in his recent article Three Shares To Buy Now, the market capitalisation of the three companies in question are all below £60 million. To find out the names of these three companies, and to get free instant access to al his research for the next 30 days, simply click here for more details.

More on the economy and the markets:

> A version of this article was originally published on Fool.com. It has been updated by Bruce Jackson. He does not have an interest in any of the companies mentioned in this article.

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Comments

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lotontech 10 Jun 2009 , 9:23am

I think that this article is basically correct, with a few provisos:

1) Just because multi-bagging stocks are more likely to be small caps does not necessarily mean that small caps will become multi-baggers. (the article does hint at this)

2) The smaller the stock, the bigger hit you take on the bid-ask spread. You could lose a high percentage of your investment as soon as you buy in, because you cannot resell it at the same price.

Ideally we would like the liquidity (hence small spread) and apparent 'safety' of big cap stocks at small-cap prices and with the possible multi-bagging potential. Well, the financial crisis threw up quite a few of these:

Barclays Bank, a 6.5-bagger since March.
Enterprise Inns, a 5-bagger since Jan.
Allied Irish Bank, a 9-bagger since March.

..and so on.

There are some of the stock that I included in my "2000% in only 12 weeks" portfolio at http://lotontech-money.blogspot.com/2009/05/2000-in-only-12-weeks.html , but I have to say that the performance in this portfolio was as much about sound money management as it was about clever stock picking.

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