It's all well and good to say a stock posting improving earnings is a good buy with upside potential. But how much upside? The truth is that picking stocks capable of dramatic gains -- potentially as much as doubling your money -- is much harder. That's because charts don't offer much information for big moves like this, and efficient market theory argues against such short-term performance.
But finding doublers, while difficult, is not impossible.
One good place to start is screening book value analysis or cash analysis to find a deal, or to find potential acquisition targets. Also, while a turnaround typically takes more than a year to come to real fruition, there are still success stories -- such as Chipotle Mexican Grill (CMG), which was trading around $60 in October 2009 and is now up to about $160 per share, topping even its 2007 highs.
Here's a look at three stocks that could double in the next 12 months if things play out. All of these stocks are actively traded, with an average volume of over 1 million shares daily, and they all have at least some stock options tied to them to reach that profit goal.
#1 – Brocade Communications Systems (BRCD)
Brocade Communications Systems, Inc. hasn't headed in the right direction so far in 2010. Brocade is currently just a bit above the bottom of its 52-week range ($4.64 to $9.84). But in the world of technology consolidation, the Cisco Systems, Inc. (CSCO) datacenter initiative is driving tech giants like Dell, Inc. (DELL), Hewlett-Packard Company (HPQ) and others to acquire smaller companies to feed the cloud-computing future of data and networking. After Brocade and Foundry merged, the company is now nearly a complete "poor man's Cisco" that's a great buyout target.
Brocade is a low-cost provider in many aspects, and its turnaround hasn't really turned around -- yet. Outside of any buyout hopes, Brocade trades at less than 10 times 2010 and 2011 earnings. However, it carries higher debt ratios than many tech peers and may need new management to gain market share. If it competes on price, capturing even 1% more of total market share, that would be a major coup and that would generate massive returns for holders and could spark a 100% run-up from the bottom in the next year or so. BRCD is just one such stock that could double in the next year.
#2 – Citigroup, Inc. (C)
Citigroup, one of the "too big to fail" banks, is slowly and sloppily getting out from underneath the government. What's more, bank pressure under Fin-Reg is hurting the stock. It's sitting at the bottom of its 52-week range ($3.11-$5.07) – a far cry from its +$50 valuation as recently as 2007.
There is undoubtedly a long way to go, and Citi may never get back to that lofty share price. CEO Vikram Pandit is probably not even half way to getting to a core Citi after divesting assets, so who knows what the smaller bank ahead could be worth on a per-share basis. But Bill Ackman's Pershing Square disclosed he's put a few hundred million dollars into Citigroup on the theory that it trades at about 3 or 4 times what the future company's core earnings will tally. That kind of value coupled with a current share price that's about the price of a Big Mac makes a doubler a very real possibility.
#3 – Energy Conversion Devices, Inc. (ENER)
Energy Conversion Devices has been one of the solar players that has not fared out well in 2010 - though it's hardly the lone loser in the sector. Shares are now at the worst levels in recent memory, around $4.50 as of this writing (52-week range of $3.76-$14.21) but shares peaked north of $60.00 back during the energy bubble of 2008.
The company is said to need cash soon by some, but its cash position rose to $205 million. And just this week, ENER posted an above-estimate report and solar sales rose +25% sequentially and +77% year over year; net revenues rose +19% sequentially and +68% from a year earlier. While it grew shipments, cut inventory and raised cash flows, it is targeting sales growth and margin expansion -- all signs of big growth potential despite the fact that ENER is still losing money. That potential better be realized, however, if investors are to see a double in this stock. Energy Conversion Devices has fallen hard over the last few years, and any takeover bid would have to be exorbitant to win shareholder approval.
As of this writing, Jon Ogg did not own a position in any of the stocks named here.