Every investor wants to own a stock with substantial price-appreciation potential. A doubling of the investment -- a 100% return -- is the milestone that most registers an investment as a success.
If doubling your money is the goal, there are five indicators you need to consider. These indicators will lead you to investments that offer the highest probability you will double your money in the safest, most reliable way possible.
1. Being Out of Favor. This is the most obvious -- yet most difficult -- indicator to act on. The reason is that an out-of-favor stock is usually suffering price-depressing difficulties: lawsuits, product-launch disappointment, a contracting market, etc. Many investors are simply too timid to invest in the heightened uncertainty. They want to wait until the outlook has cleared. The problem, of course, is that once the crisis has run its course, the share price has already advanced and the opportunity for exceptional return has passed.
Altria (MO) is a great example of the return potential of acting as a contrarian. A few years ago, Wharton School finance professor Jeremy Siegel wrote an article for Yahoo Finance titled "Ben Bernanke's Favorite Stock." Altria was the stock. Over the past 50 years, Altria has been the top performer in the S&P 500 for investors who bought when Altria was out of favor, which occurred when it was under attack from government bureaucrats and private lawyers. The resulting sell-offs created tremendous buying opportunities, thus making the inevitable recovery that much more profitable.
2. Dividend Increases During Market Turmoil. Again, I have to refer to Altria. During the throws of the stock market meltdown in late 2008 and 2009, Altria continued to raise its dividend. And it has raised the dividend annually since. In fact, Altria has raised its dividend for 44 consecutive years. Altria's share price has subsequently doubled since 2009.
3. Stealth Progress. Perceptions and legacy businesses die hard. Consider IBM (IBM). Many investors still think of computer hardware when they think of IBM, but that's no longer the case. IBM left the last vestiges of hardware when it sold its personal computer business to Lenovo in 2005. IBM is now a higher-margin software, IT-consultancy, and systems-integration company. It's also well on its way to seeing its shares double since jettisoning the low-margin computer hardware business.
Deluxe Corp. (DLX) is an even more striking example. The average investor probably avoids Deluxe like the plague, perceiving that its primary business is check printing, which we all know is going the way of Betamax. But over the past decade Deluxe has used the ample cash flow generated from its withering check-printing business to branch into the burgeoning space of small-business specialty printing and marketing. The result? Deluxe's share price has exploded more than sixfold during the past four years.
4. Insiders Pile In. When managers and directors put their own money into the company's stock, it's time to pay attention. Insiders sell for various reasons, but they buy for only one -- to make money. NN, Inc. (NNBR), a precision ball-bearing manufacturer, experienced a huge inflow of insider money in early 2010. In a little more than three years, its shares have nearly tripled. Companies that see a large influx of money from insiders are worth a close vetting.
5. Financial Strength. Companies with pristine balance sheets (a lot of cash and little debt) are frequently attractive investments for two important reasons. They have the financial flexibility and wherewithal to move into attractive businesses. And if they don't, they are attractive acquisitions to an outsider who will move them into attractive businesses.
Berkshire Hathaway (BRK.B) is the epitome of financial strength and flexibility, and uses it to expand into other business sectors. On the other side, Anheuser Busch, taken over by Belgium-based brewery conglomerate Anheuser-Busch Inbev (BUD), enriched investors when Inbev exploited Anheuser's inertia by acquiring its assets and allocating them into markets Anheuser's managers neglected to tread.
Investing in a company displaying any one of these indicators will point you in the direction of doubling your money. But investing in a company encompassing all five indicators raises the odds exponentially.