How to Get a 100% Return

You can find stocks today that will double in the next three years.

Yes, that's an aggressive prediction (particularly in this market), but recent volatility has made some outstanding stocks available for cheap. They're so cheap, in fact, that they will offer 26% annualized returns over the next few years.

How can you find them? By focusing on three key criteria.

1. Value
There's no point in buying stocks if you aren't getting them at a bargain price. By definition, fairly priced stocks will have only average performance. And if you're just trying for average performance, you may as well just buy an index fund.

If you actually want to beat the market, you have to buy stocks for less than they're worth. Suppose that you buy a stock for 40% less than its fair value. If that stock just returns to its fair value, you'll get a 67% return. Even if it takes two years to bounce back, you still get a 29% compound annual return.

Apple (Nasdaq: AAPL) was a good example of this. Back in 2003, for months, Apple traded just barely above its tangible book value, and a big chunk of that tangible book value was cash. Investors were basically saying, "Apple has only scrap value. Its innovative development teams, $6 billion in sales, excellent brands, and loyal customers are worth absolutely nothing." But investors who actually looked at the business could see that it was undervalued by at least 50%. Those investors have done spectacularly well. Half of their gains are due to Apple's rock-bottom price at the time.

2. Growth
You can do well with undervalued stocks that don't grow, but growth puts you over the top. It can sometimes take a couple of years for an undervalued stock to reach its fair value, though. If the company grows during that time, then the fair value increases, giving you a bigger upside. What's more, if a company is growing, you can delay taking a gain, since the value of your investment will also continue to grow.

The combination of growth and value can lead to excellent gains. Our Inside Value investing service recommended MasterCard (NYSE: MA) in the summer of 2006, when it was in the low $40s. Not only did MasterCard seem significantly undervalued at that price, but we also expected that it would grow quickly. We were right. The fair value of the stock increased dramatically, and the share price grew even faster. We got a triple in less than a year, thanks to a lucrative combination of the company's growth and the stock increasing to its fair value.

3. Sustainability
You'll want to buy stocks that will grow for years -- an extremely important criterion that investors frequently overlook. For example, Micron Technology (NYSE: MU) has often demonstrated excellent growth and seemed undervalued in the past. But Micron operates in the highly competitive computer-memory market, where it's very difficult to sustain growth or profit margins. As a result, the stock has endured mediocre returns.

You can make the same argument with Advanced Micro Devices (NYSE: AMD). It's sometimes shown impressive growth, and at times, its processors have had a technological edge over its chief rival, Intel (Nasdaq: INTC). But Intel has the sustainable competitive advantages -- more cash, better marketing, the bigger R&D budget, and more manufacturing capacity.

It's hard to overestimate the importance of sustainability. Every long-term winner in the stock market is successful because it has a sustainable competitive advantage. eBay (Nasdaq: EBAY) has its networking effects. Apple has its brand, its innovation, and its customer loyalty. Merck (NYSE: MRK) has its patents, its financial clout, its sales team, and its skill at bringing new drugs to market.

The Foolish bottom line
Value, growth, sustainability. When these three characteristics come together, you have the potential for 100% gains within a few years -- so focus on them like a laser beam.

If you'd like some help, we search for all three each month in Inside Value, and we believe that our two recommendations in February have the potential to double over the next three years. If you're interested in reading more about those stocks and all the stocks we like for new money now, click here to join Inside Value free for 30 days. There's no obligation to subscribe.

Fool contributor Richard Gibbons will do a happy dance if his portfolio doubles in three years. Intel is an Inside Value pick. eBay is a Motley Fool Stock Advisor selection. The Fool disclosure policy is flirtatious.