When looking for stocks that could double your money, you're likely to keep seeing the same companies mentioned over and over again. Why? It's simple. Some of the most popular stocks are popular for a reason: They're among the best at creating value for their shareholders.
Don't get bored with hearing about the same stocks all the time. Chances are they really are great candidates for doubling your money.
But sometimes new ideas are needed too. With this in mind, here are five diverse stock ideas that could double your money. These are companies from industries including consumer goods, advertising, real-estate technology, semiconductors, and financial technology. But all five are lesser-known and rarely discussed. These kinds of new-idea stocks aren't necessarily my strongest doubling candidates (I like the well-known stocks too). However, I still think there are strong cases to be made, as we'll see.
1. Purple Innovation
The stock price has already more than doubled over the past year, but mattress company Purple Innovation (PRPL -0.95%) could double in value again for its investors. This company distinguishes itself from most other mattress companies because it owns its manufacturing process. Its gel-filled polymer mattresses are made with proprietary technology. Because of this, Purple literally had to invent its own mattress-making machine before it could mass-produce its products.
This nuance has hindered Purple's growth in the past -- demand has outpaced supply. To try to keep up, the company had to add two new machines to its Utah plant in 2020, and it's currently working on a new facility in Georgia. Even with its manufacturing limits, it grew full-year 2020 revenue by 51% to $649 million. Much of this was growth through Purple's e-commerce channel. In 2021, showrooms are reopening, helping to fuel management's projected top-line growth of 33% to 39% in 2021.
With Purple stock, investors get a company that's growing revenue at a quick pace by stealing market share. Its profit margins are also expanding -- in the first quarter, gross margin grew from 43.5% last year to 46.9% now. Furthermore, the company is profitable and trading at a reasonable valuation for a growth stock. Right now, it trades for just 19 times projected 2021 adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), which will look like a bargain in three to five years if Purple continues on its current trajectory.
Another lesser-discussed idea for doubling your money is supply-side advertising technology company PubMatic (PUBM 1.49%). Investors are likely more familiar with Magnite, which is the largest player in this space. However, PubMatic is in second place and growing fast. In the first quarter of 2021, revenue was up 54% year over year. And for 2021, it's expecting revenue growth of 31% to 34% from 2020 levels.
A bet on PubMatic is a bet on programmatic advertising first and foremost, which is still an emerging space. It's the hottest trend in advertising. Consider that in 2020, advertising revenue fell as a whole. However, digital ads stole market share from traditional ads with 12% annual growth, according to a report from the Interactive Advertising Bureau. And the same report showed that programmatic ads (a subset of digital ads) grew 25%, outpacing digital ad growth.
As programmatic advertising grows, so too does the opportunity for PubMatic's services. However, third-party supply-side ad-tech companies like PubMatic aren't technically necessary -- some publishers do it themselves. Therefore, it's important for PubMatic to do a good job. And it seems like it is. In Q1, it had a net dollar-based retention rate of 130%, compared to 112% last year. The simple translation of this metric is that PubMatic is generating more revenue from the same number of customers over time, suggesting its customers indeed see value in its services.
For the record, I think Magnite and PubMatic can both be winners. I own Magnite stock because it's the biggest player. But I concede that it got that way from acquisitions and mergers. In contrast, PubMatic is growing faster organically, and it's a good reason to not dismiss this player. Moreover, PubMatic is a founder-led company with stellar company ratings on Glassdoor -- a trait shared by many past market-beating investments.
Real-estate technology company Latch is in the process of being brought public by special purpose acquisition company (SPAC) TS Innovation Acquisitions Corp. (TSIA). The terms of the deal are based on a price of $10 per share. At $10, Latch has a post-acquisition market capitalization of roughly $1.5 billion. And that looks outrageously overvalued. For perspective, it estimates (finalized numbers are forthcoming) that it had just $18 million in full-year 2020 revenue. That's an extreme price-to-sales ratio of 83.
However, this seemingly extreme valuation is misleading due to how Latch does business. The company sells to landlords looking to upgrade their properties with smart devices. Many times, these are installed when the property is built. However, because of this, there can be as much as a two-year delay from when revenue is booked and when the revenue actually starts coming in.
Latch had just $29 million in booked revenue in 2019. Now, it has $165 million as of the first quarter of 2021. That's up about 87% from the previous year. And this bookings growth will start translating into actual revenue growth pretty quickly. Therefore, Latch isn't as overvalued as it looks at first glance.
In fact, if it hits management's projected numbers, then Latch stock is an extreme bargain. The company expects almost $250 million in free cash flow (FCF) in 2025. Consider that it's not uncommon for a stock to trade at 20 times FCF. But right now it trades at just six times projected 2025 FCF. Therefore, the stock could triple over the next five years and still be at a normal valuation just by hitting its guidance.
To get there, Latch will need to grow at an incredible pace over the next five years, so take management's guidance with a grain of salt. But the company has abnormally good revenue visibility because of what's already booked and the length of those contracts. Therefore, I'm willing to give it the benefit of the doubt, making it a top stock to buy now.
4. MKS Instruments
If you're building a diversified portfolio, it really needs to include some exposure to the semiconductor industry. From cars to smoke alarms, everything's getting smarter. And data creation is exploding higher at an incredible pace. Our world constantly needs more semiconductors to make this all happen, and MKS Instruments (MKSI 3.05%) is a great way to profit from the trend.
MKS Instruments' products are used to help control manufacturing processes. There are a lot of public companies like this, but many of them have concentration risks with customers, markets, and use cases. By contrast, MKS Instruments' top 10 customers only made up 44% of revenue in 2020. Additionally, 55% of revenue is generated internationally across various markets.
Finally, 59% of revenue comes from the semiconductor industry, and the rest is generated from applications in things like medical devices and national defense. In other words, MKS Instruments is well-positioned to adapt to market fluctuations thanks to its extremely diverse revenue streams.
But perhaps what really sets MKS Instruments apart is management's track record of good capital allocation decisions. It recently bowed out of a bidding war for rival Coherent because management believed the price was too high to add value for MKS Instruments' shareholders. Instead, it pivoted to acquire Canadian company Photon Control in a roughly $320 million all-cash deal.
Past mega-acquisitions like Newport Corp. in 2016 and Electro Scientific Industries in 2019 contributed to significant earnings growth in the past -- net income is up roughly 400% over the past five years. And it's likely Photon Control will be accretive to earnings and cash flow in short order as well.
In the past, MKS Instruments has managed to generate strong cash flow. And management has proved its commitment to using that cash flow to go out and acquire more cash flow. This is a great combo. Over the long haul, earnings growth can lead to market-beating stock performance, and it's why MKS Instruments is on this list.
In the early days of the COVID-19 pandemic, StoneCo (STNE 2.75%) management made a big mistake: It decided to scale back, anticipating a slowdown for its business. This is a fintech company in Brazil, the country that's been hit the second hardest by the coronavirus. Management cut back on its staff only to see an unprecedented surge in adoption, causing it to play catch-up for the remainder of the year. Nevertheless, for 2020, total payment volume (TPV) on its platform grew an impressive 39% year over year (excluding the benefit from government stimulus payments) and StoneCo's revenue was up 29%.
In fact, the coronavirus drove the adoption of financial technology solutions in the underpenetrated Brazilian market, which bodes well for the long term. Keep in mind that Brazil is the world's eighth-largest economy, according to the International Monetary Fund, so tapping this market is a big opportunity. Importantly, StoneCo is winning where it matters: Customer acquisition. It now boasts almost 653,000 active merchants using its products, up 36% from last year. And in addition, it has 114,000 micro-merchants, up 75% just from last quarter.
Customer growth is key for StoneCo for two reasons. First, there's the obvious benefit. As fintech displaces cash over time, the company is set to win as TPV grows. But second, once it gets its foot in the door, it can expand with ancillary services. For illustration, only 10% of StoneCo's small and medium-sized businesses used more than one product in 2019. In 2020, 34% were using more than one. This means the company can build an ecosystem over time, helping it gain operating leverage.
StoneCo is a fast-growing player in a major global economy, and it's winning more business with its customers. Not to mention, this is a solidly profitable company, with roughly $158 million in net income in 2020. As future revenue growth drops more to the bottom line, I like StoneCo stock's odds of doubling.
So there you have it: I believe Purple Innovation, PubMatic, Latch, MKS Instruments, and StoneCo are five stocks that can double your money if they keep executing as they are right now. However, managing expectations is important. With investing, a bullish thesis can take time to develop. I wouldn't hold my breath for these to double in the next year or two -- I'm thinking more over a five-year span. That may seem like a long time to wait. But a long time horizon is often best when it comes to buying stocks.