Expect 100% Returns From These Stocks

Do I really expect 100% returns when I buy a stock? Absolutely.

It's not nearly as crazy as it sounds. I'll explain why and give you some specific stocks that I expect 100% returns on.

Why 100% returns are attainable
Right about now, many readers are probably looking at their individual stocks and seeing a huge difference between their historical returns and 100%.

Consider this, though.

We have to factor in the harsh reality that we'll get a lot of picks wrong. Peter Lynch famously said, "In this business, if you're good, you're right six times out of 10. You're never going to be right nine times out of 10."

But too many investors discount that nugget of reality by mistakenly clinging to Warren Buffett's inspirational quote: "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1."

No matter how careful we are in our due diligence, events will cause us to be wrong. Often. Even Buffett takes a bath sometimes.

So our winners have to make up for our losers.

The stocks I expect 100% on
A mistake many investors make when they buy a stock is that they don't think about when they'd sell the stock. This includes factors such as the business environment changing, increased competition, company-specific problems, and, yes, stock price gains.

Let me explain with two stocks I recently bought for the public real-money portfolio I manage for The Motley Fool (I also subsequently bought these for my own account when Fool trading rules allowed me to).

Company

Date Purchased

Purchase Price

Current Price

Return*

Bank of America (NYSE: BAC  )

11/2/2010

$11.38

$14.49

27.3%

JPMorgan (NYSE: JPM  )

11/2/2010

$37.15

$45.53

22.6%

Source: The Motley Fool. *For simplicity, excludes dividends, which are pretty much immaterial.

When I bought these two big banks, I bought them on weakness. There was (and still is) a good deal of uncertainty regarding their handling of foreclosures. In a worst-case scenario, they'd have to take major hits on a lot of troubled mortgages. My basic thesis was that it wasn't (and isn't) as bad as the market fears because the government has proven it is interested in keeping the too-big-to-fail banks healthy.

The big problem for me with these banks is that there is very little visibility into their operations. They are no doubt engaging in financial engineering we wouldn't understand even if they made everything transparent. And we saw with the financial crisis exactly what happens when those cobbled-together financial products blow up.

But 10 years from now, we'll still have banking, and most likely we'll still have Bank of America and JPMorgan. And remember, when I say Bank of America, I'm really saying Bank of America plus its fire-sale acquisitions of Merrill Lynch and Countrywide. And when I say JPMorgan, I'm really saying JPMorgan plus its fire-sale acquisitions of Bear Stearns and Washington Mutual. Very simply, at price-to-book values below 1.0, the market wasn't giving them much credit for any of that.

Despite my current bullishness, these aren't the kinds of companies I want to hold to the grave. Only at bargain-basement prices am I interested in companies that even Einstein would struggle to understand. Once those price-to-book values get close to 2.0 (or before), I'll be thinking hard about selling. Basically, I think 100% returns are attainable on these two banks. If the market gives me that 100% return in the next year or two, I'll be seriously eyeing the exit.

But I may not sell these stocks
Contrast that with some other stocks I bought for my personal portfolio. I bought each of the three below stocks on Oct. 8, 2008, when the stock market was in turmoil. For context, this was just after Lehman Brothers went down and just before the government doled out money for the original TARP bank bailouts. The S&P 500 was sitting at 985 and the Dow at 9,258.

Take a look at the stocks before I explain why I may not settle for a 100% return on these.

Company

Purchase Price

Current Price

Return*

Accenture (NYSE: ACN  )

$29.49

$52.99

79.7%

Disney (NYSE: DIS  )

$25.27

$43.31

71.4%

Philip Morris International (NYSE: PM  )

$42.50

$59.17

39.2%

Source: Yahoo! Finance. *Return since Oct. 8, 2008. For simplicity, excludes dividends.

My buy thesis on each of these three seemingly dissimilar companies was similar. The market was in turmoil and giving us some cheap prices on blue-chip stocks that would weather all but the most catastrophic conditions. In a prolonged downturn, consulting services (Accenture), entertainment and tourism (Disney), and maybe even smoking (Philip Morris International) could take some hits, but these were all best-of-class players in their spaces.

Since my buys, the S&P 500 is up about 34%. So each is beating the market, and Accenture and Disney are doing so significantly. But if (hopefully when) they reach 100% returns, it's very possible I won't sell.

What's the difference between the two banks I mentioned before and these three?

The difference is that while I believe the banks will be around years from now, they are built to boom and then bust. If my buy thesis plays out before the next bust, cashing out makes a lot of sense.

In contrast, I believe these three stocks are built for the long haul. Their business models are pretty straightforward and, outside of normal cyclical volatility, steady. Even if their stock prices double from my buy-in price, their earnings should also be moving up steadily and relatively predictably. Despite their run-ups, the forward earnings multiples for Accenture, Disney, and Philip Morris stand at 14.9, 14.7, and 13.6, respectively. Not exceedingly expensive.

The takeaway
So back to the original question. Do I really expect 100% returns when I buy a stock?

Absolutely.

Do I get 100% returns on every stock I buy?

No way.

Not even close. But the winners have to make up for the losers. And just like Buffett seeks to never lose money, I seek a large return on the stocks I buy. Just not in the overnight, get-rich-quick way speculators target. When I buy a stock, I fully expect to hold it for years, not months. If the stock doubles in five years, that's a healthy 15% average annual return (plus dividends). If it's sooner, much the better. Of course, in the case of companies like Accenture, Disney, and Philip Morris, I may reup my bet if I conclude that shares could go up another 100%.

Now those are some great expectations.

As you look for your own stocks that you feel could go up 100%, I invite you to download a free copy of our report, "5 Stocks The Motley Fool Owns -- And You Should Too." My recommendation, the last of the five, drives its returns primarily through its powerful dividend. And it's trading just a bit above where it was when I bought shares for The Motley Fool. Click here to get started.

Anand Chokkavelu owns shares of Bank of America, JPMorgan Chase, Accenture, Disney, and Philip Morris International. Accenture and Walt Disney are Motley Fool Inside Value selections. Walt Disney is a Motley Fool Stock Advisor recommendation. Philip Morris International is a Motley Fool Global Gains selection. The Fool owns shares of Bank of America, JPMorgan Chase, and Philip Morris International. Through a separate account in its Rising Star portfolios, the Fool also has a short position on Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (26) | Recommend This Article (110)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 11, 2011, at 5:00 PM, NovaB wrote:

    I bought Gramercy Capital Corp at 2.20 on 12/22/2010. Today it closed at 4.89. That is a 122% return.

    I also expect my investments in LYG, ING and others to more than double.

    Almost all my investments pay dividends, too.

  • Report this Comment On February 11, 2011, at 5:34 PM, TheVAGent wrote:

    I thought that the returns for PMI were surprisingly low. Doing the math I discovered that the "Return" was calculated by dividing the difference between the Current Price and the Purchase Price by the Purchase Price. This is very misleading.

    The purchase date of October 8, 2008 would have missed the October dividend of October 13, 2008, but earned $2.20 in 2009, $2.38 in 2010, and $0.64 on January 10, 2011, for a total of $5.22 of non-dividend-reinvested income.

  • Report this Comment On February 11, 2011, at 5:38 PM, TheVAGent wrote:

    cont.

    If you add the dividends to the Current Price and perform the same calculations on the total, $64.39, you get a much more respectable Return of over 51.5 percent.

  • Report this Comment On February 11, 2011, at 8:02 PM, Merton123 wrote:

    Good article Anand. You purchased five stocks which have currently outperformed the market. You raise a good question of when do you sell (if ever) a company? The Buy and Hold crowd will point at the long term success performance advantage of the various indexes over the majority of investors. They will also argue that in a non retirement account the inevitable capital gains tax coupled with the cost of buying and selling create an very tough hurdle indeed to jump over.

    The buy and sell crowd will argue as you are doing that it is possible to identify opportunities to make good money. You make the point that even with the best research not all a person stocks picks will do well. Which raises a follow up question - do you believe that an investor should concentrate their portfolio or have a diversified portfolio? The more stocks a person ownes the higher the probability of the overall portfolio will reflect the market averages. The fewer stocks a person ownes the higher the probability that the investor can achieve a differentiated return from the market. What is your opinion about the optimum size of a stock portfolio. I am also asking everyone who reads these posts the same question - not only Anand.

  • Report this Comment On February 11, 2011, at 9:11 PM, 2cartalkers wrote:

    Although the bank stocks look good let's have some ethics, not ONE banker has been held accountable for the financial debacle they foisted on the world. Their actions hurt many financially and THEY SHOULD BE HELD ACCOUNTABLE!

  • Report this Comment On February 12, 2011, at 1:49 AM, Ozcutty wrote:

    If you read the PM conference call they talk about dividends and buy backs since the spin off from MO, some pretty big numbers in there. I too am up 35% plus 15% in dividends so around 50% in PM.

    My only problem with PM is i owned too much of them! sold a qtr of them and bought V on the dip and am comfortable.

    My worst performer is TEVA, sometimes even high quality stocks at bargain prices go no where for ages!

  • Report this Comment On February 12, 2011, at 9:43 AM, bigkansasfool wrote:

    Good article. I've been having those same thoughts regarding whether to hold or sell my current best performing stock in my portfolio. I own LECO which is up 150% since early 2009 when I bought it. Each time I think about locking in the gains I look at their quarterly reports along with their management and their long term prospects and I decide to hold because nothing has changed from the reasons I bought the stock in the first place.

  • Report this Comment On February 12, 2011, at 11:16 AM, FoolSolo wrote:

    The question I have is why? Why these two stocks? There are companies out with strong growth, very clean balance sheets, and no Voodoo involved, which are much more likely to double in the next 3-5 years.

    I bought AAPL in 2008 for $87, and I'm still holding it today after more than 310% return because the value is still strong in the company, and I can read their balance sheet and their quarterly reports and get a reasonable understanding of what they are doing.

    When I look at these banks, I have no clue what their value is because I have no way of knowing what assets, or junk, they are carrying. Their incomes are purely speculative, and with housing still falling, these banks could possibly be worth next to nothing if they realize the true losses on their books. In my mind, the risk is far greater than the reward. I think there are plenty of better companies out there with much more potential than these to appreciate and double.

    Also, what is the time horizon you are willing to hold these guys for? If you go into the investment with an expectation of 100% return, there must be some horizon when you expect it to happen. A steady, compounding, 15% annual return gives you 100% return in 5 years. Are you planning to wait 5 years for these guys? And if you are, then how do you do your due diligence on their financials to determine if they are still good investments throughout that time?

  • Report this Comment On February 12, 2011, at 11:53 AM, FoolSolo wrote:

    @merton123,

    Good question. The issue of diversification can be tackled in many ways. I have always felt that a big portfolio (in value) is much more difficult to manage than a small one. When I first started investing, it was relatively simple, I started with one or two stocks, and as they appreciated and I continued to add to my investments, I added some, sold some and so on.

    Now I have a sizable (for me) portfolio, and I find it much more difficult to stay fully invested. Not counting my 401K, I have about 20 securities, and I'm about 60% invested, keeping some cash for new opportunities. My 20 securities are spread out over energy, technology and health care/pharm mostly, with a little natural resources/materials sprinkled in. Given my age, I feel I have another 15 years or more to retirement, so I have a fairly aggressive style, but I would tell you I am more of a value investor than a growth investor.

    So, how do I diversify? My strategy has been a bit simple, I just let my screening process do most of the work. I have screens that echo may value conscious style, without focusing on any specific sector. The natural selection process seems to spread my exposure around reasonably well. However, I do tend to shun certain sectors, just because I don't understand them, or because they are cyclical and difficult to analyze. The trouble is that to keep my portfolio fully invested, my lots are growing bigger. With the exception of AAPL, I usually take 500-1000 shares at a time now, or roughly $15-20K per trade, which makes me a bit more nervous because when the market moves, I can be up or down $8-10K in a single day (like 1/28/2011 when Egypt turmoil started), which is dizzying for me.

    Lately I've been thinking about rebalancing a bit, and putting more of my idle money into the market. But I'm less concerned about diversifying across sectors, I want my diversification to include income (dividend), growth, value, International, and further I want to include options income. So I have created some new screens to help me identify opportunities that fall into these categories.

    I am also very concerned about the continued erosion of the US$, so after some research I have decided I need to invest in precious commodities and raw materials (and keep my energy exposure), which tend to be a bit more currency neutral.

    I'd be interested to know how others are sizing their portfolios and diversifying.

  • Report this Comment On February 12, 2011, at 2:39 PM, personalwm wrote:

    While the approach may (or may not) make sense, there needs to be a context.

    Considerations include: time horizon; inflation and risk-free rate of return; investments of a similar risk level.

    100% in a year sounds great. But over 5 years that is less than 15% annually. And over 20 years, less than 4% per annum. You need to factor in holding periods when considering investments.

    If you live in the U.S. or Canada, inflation is not a current problem. But had you invested in the early 1970s when inflation was over 10%, 100% might not seem that great.

    Or if you live right now in places like Zimbabwe or Venezuela, annual returns of 100% might not be very good.

    Finally, how does the expected return measure against peers and other assets with similar risk levels?

    An investment with an expected return of 100% (assuming a reasonable time frame and no inflation worries) may be a legitimate value or growth play. But they must be analyzed against comparable assets.

    Or perhaps the 100% return is based on increased risk exposure. You need to look at other assets with similar risk. Investment analysis must be apples to apples, especially with respect to volatility.

    For more investment commentary, please visit www.personalwm.com.

  • Report this Comment On February 12, 2011, at 7:42 PM, Teo123 wrote:

    It's crazy to expect a 100% return from B of A -- at least in the next decade. They paid too much for Countrywide, an acquisition that carried too much risk. Think about how much you have to sell to absorb a $500,000 loss on 1 option ARM. Now imagine an entire enterprise -- Countrywide -- filled with such deals. Add to this the Merrill Lynch challenge (i.e. selling highly rated mortgage backed securities which perform poorly because the mortgages contained little down payment and/or had poorly structured loan terms).

    I can see a nice return from Chase, if the economy continues to improve because it waited for WAMU's failure. Once WAMU failed and Chase made an offer, it could pick up the pieces of the bank it wanted while the government/DIF picked up some losses.

    Either way, there are better banks out there.

  • Report this Comment On February 13, 2011, at 11:10 AM, Merton123 wrote:

    Foolsolo - I have the same concerns about the US currency and therefore purchase Vanguard Total World Stock Index and also Motley Fool Independence Fund which have 50% or more exposure overseas. China has already started to raise their interest rates, and European governments have started austerity programs. The Wall Street Journal is saying that our government is talking about deep cuts to the U.S. military but will leave the entitlement programs relatively untouched. I believe that large cap stocks like Proctor Gamble, Con Agra, Coca Cola are inflation proof and are at the end of the value chain for commodity (i.e., agricultural - Con Agra and Coca Cola). Everyone will continue washing their clothes so Procter Gamble is also a good purchase.

  • Report this Comment On February 13, 2011, at 4:04 PM, osucowboys344 wrote:

    if you want to make a 100% return than invest in small cap companies. These big dinosaur companies have huge downside and very little upside. Stick with solid small caps like xrtx, sma, hska, and tat. small caps always outperform large cap.

  • Report this Comment On February 13, 2011, at 5:37 PM, FoolSolo wrote:

    @Merton123,

    Those are fine, although PG is a bit stodgy in my mind. However, there are some great plays in Energy (NOV, DRQ), Consumer Goods (AAPL), Tech (CHKP, VECO), and others too.

    From my standpoint, I feel I need to diversify into foreign stocks, particularly in precious metals, chemical, coal, and raw materials. So I've bought some small lots in GFRE, LLEN and am looking into LIWA and JIT to name a few. I'm also rethinking NTES and BIDU.

    I'm very concerned about the US$ continuing to slide to the Chinese. So we need a strategy to hedge the slide.

  • Report this Comment On February 13, 2011, at 9:46 PM, stanattack wrote:

    Caterpillar should be on that list. In August 2009 I bought 16 shares at 46.80. It is now at 103.54. I am up 119% and it is expected to rise to $121 by 3rd-4th quarter 2012. It is definitely a buy

  • Report this Comment On February 14, 2011, at 5:41 PM, TMFBomb wrote:

    @TheVAGent and others,

    Yes, I excluded dividends in my gains (see notes at the bottom of the tables).

    @Merton123,

    Personally, I believe in a good amount of diversification for all but folks like Buffett. I diversify by putting a good chunk of my stock portfolio into carefully selected mutual funds and index ETF's (Vanguard. mostly). Then in the portion of my portfolio in which I make my own picks, I use a standard position size so that I don't get too carried away. When I'm highly confident, I'll do 2x the standard position size (an example is when I bought into Berkshire Hathaway during the financial crisis).

    I get the argument that diversification taken to its logical extremes is just market performance, but I think the bigger risk for most of us is taking on too much risk by concentrating our portfolios. Stuff happens.

    @personalwm,

    Obviously, the shorter the better on the 100% return period. I try to buy stocks that I'm happy holding for years (three to five to start with) as the thesis plays out.

    @osucowboys344,

    The examples I gave above were large cap stocks. Well-chosen small caps can generate great returns -- they are underfollowed and more volatile. They also take more due diligence.

    To be clear, though, in general when I say small cap, I mean $200 million to $2 billion in market capitalization that are traded on major U.S. exchanges. Going lower in market cap and going to the Pink Sheets/over-the-counter, can be dangerous for all but the most experienced investor.

    Fool on,

    Anand

  • Report this Comment On February 17, 2011, at 1:59 PM, mderelus wrote:

    hello how is everyone doing ? i am very new and unexperience in this i just open an account in tradeking and i am looking to invest $1000 in the market but i really dont know which stock i should invest in i dont plan on doing anything with the money for 5yrs. please help any input is welcome thank you.

  • Report this Comment On February 18, 2011, at 12:46 PM, vj3722 wrote:

    To mderelus

    check out investment clubs in your area. most have good investment advice and it's a good way to start learning without a large investment

  • Report this Comment On February 18, 2011, at 1:36 PM, drew1960 wrote:

    As a large Berkshire share holder I naturally follow any news associated with the stock. Your article quotes Buffett and even links us to an article on how he made his money. So it raises my eyebrows when you recommend BofA,and Buffett dumps it. What gives?

  • Report this Comment On February 18, 2011, at 11:22 PM, rwk2008 wrote:

    Almost anyone can cherry-pick a few of their stocks that have gained 100% over time. Before rushing out to buy these, I'd like to know the whole picture - of all the stocks the author has purchased, and how they did while he owned them. At least the founders of MF let us see the performance of their recommendations.

  • Report this Comment On February 20, 2011, at 1:07 PM, TheDexter wrote:

    I liked BAC (BofA) better when I paid $3.32 per and sold @ $18.00 .

    Just saying..

  • Report this Comment On February 21, 2011, at 8:03 PM, echapman47 wrote:

    I did not invest in any of those big banks you mentioned, and do not intend to invest in them, although I do own shares of USB. Two Stock Advisor stocks that I purchased are now up 105% and 177% respectively.

    (1) NOV, purchased May, 2010 - up 105%

    (2) NVDA, purchased July 2010 - up 177%

    I may sell NVDA soon since it appears to be slightly overvalued.

  • Report this Comment On February 22, 2011, at 12:12 AM, RxDan1 wrote:

    I think we have to weigh not just how much money one may make but also the illegalities that these two companies represent. Both JP Morgan and Bof A have much tobe desired in terms of ethics let alone negative outcomes.. Both have shown aggressive forclosure policies whether it has to do with subprime mortgages or jeopardizing soldier's homes when they are off fighting wars. Tobacco companies or any other company that hurts are health or pollutes are planet should also not be recommended. Exceptions: those companies that are trying to make themselves better or try to spend as little as they can on controversial policies or products

  • Report this Comment On February 25, 2011, at 5:20 PM, TMFBomb wrote:

    @drew1960,

    Actually, we're not necessarily in disagreement...see this article:

    http://www.fool.com/investing/general/2011/02/15/relax-buffe...

    @rwk2008,

    I was using my own experience for illustrative purposes, but it's a fair point. You can view the real money portfolio I manage for the Fool here:

    http://www.fool.com/specials/risingstars/rising-stars-anand-...

    -Anand

  • Report this Comment On February 25, 2011, at 5:25 PM, TMFBomb wrote:

    I got this question via e-mail from a reader:

    I'm sure you've been asked this question more times than you care to know or think of, but if you'll pardon my lack there of experience and shall I say confidence in "online brokers," I was hoping maybe you wouldnt mind sharing your experiences with and any reccomendations you might have about "online brokers" (i.e. scottrade, e-trade, etc.).

    I've tried most of the major discount brokers over the years. I'm a pretty basic user (so far, I've only bought and sold stocks and ETF's...i.e. I haven't dabbled in options), so I only see minor differences among them for my purposes -- slightly different fees, different presentation of data, etc. Does anyone else have ideas on the matter?

    Fool on,

    Anand

  • Report this Comment On February 28, 2011, at 10:42 AM, SkepticI wrote:

    If there is a "worse" or more dangerous long term stock out there than BOA (Bank of America) I cant think of what it is. Their business practices are awful, they have more baggage to deal with than most, and their customer aversion factor is increasing exponentially. A long term (decades) investor and customer of Merrill lynch, I am slowly leaving them and closing my account...they did a lot for me especially in the 80's and 90's but I just cant afford them any more. Add to that, they dang near went under so risk of keeping investments with them is high...ditto BOA.

    I'm no Warren B Nor peter l and a slow learner BUT i now appreciate just how much inertia there is in any stock or business because of a worthless stock i keep in my portfolio to remind me i"m not so smart

    I work in energy< have for years understand it well and i bought this company on a drastic dip as a take over candidate it had been a high flyer not worth its stock price< returned in excess of FIFTY percent for ten years and had lots of baggage, shakey accounting and pricey acquisitions just like BOA. When it hit 6 and was in the sights of a competitor I bought it figuring it JUST HAD TO BE WORTH 8 or more (I was wrong) because I knew so much about its aquirer and business it went up for a bit, then crashed when the aquirer Dynegy walked....its name was ENRON.

    keeping that worthless stock in my portfolio has saved me thousands on stocks with bad business practices, suspect accounting and baggage to pack.

    So here's a skepticism to ponder: how can you tell the difference between a dead cat bounce and a beat down business clawing its way back?

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