Tripling your money in one year is not at all common and can involve taking investment risks that are unnecessary to achieve your retirement goals. But landing a triple-bagger over a decade is not that hard at all. It basically involves compounding your money at 12% per year. That's not an unreasonable expectation considering the S&P 500 index has returned an average annual return of 10% over decades.
If you invest in a company with a durable competitive advantage that trades at a fair valuation, the odds will be in your favor. If the company in question grows profits at a compound annual rate of 12% per year, the stock should follow and triple your initial investment.
Here are three stocks with this potential that I would buy today.
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1. CarMax
The largest used car seller in the U.S. is selling for a modest price-to-earnings ratio of 15 at the time of writing. That is too low considering CarMax's (KMX 2.76%) competitive advantages and record of delivering growth.
While competition has heated up with the entry of Carvana, Carmax hasn't missed a beat. Over the last five years, revenue and earnings have roughly doubled, driving the stock up about the same percentage before the recent market correction.
Carmax enjoys the largest selection, a wide footprint of physical locations, a growing e-commerce business, and a tremendous amount of data on used vehicle sales going back to 1993. The multiyear lead in data collection, which informs the company's appraisals and sales process, can't be duplicated by competition.
With less than 5% market share of used vehicle sales, management is targeting double-digit annualized revenue growth over the next five years. At the current stock price of around $110, investors have a good chance of earning a triple on their investment over the next 10 years.
2. Brookfield Asset Management
Think of Brookfield Asset Management (BAM +2.09%) as a value investor operating in infrastructure, real estate, renewable energy, business services, retail, and industrial markets. Brookfield owns primo commercial properties around the world and solid businesses that generate consistent cash flow.
It raises money from institutional investors looking for better returns than fixed-income securities and buys undervalued assets that are struggling. Brookfield goes in, improves operations, and, in turn, raises the value of the underlying business. It rinses and repeats, and shareholders have reaped the rewards.
Management has long targeted a 12% to 15% compounded annual return on investment. Many companies provide optimistic outlooks about the future, so it's noteworthy that Brookfield has delivered on its return target. The stock price has more than doubled over the last five years and tripled over the last decade.
With growing demand for alternative investments, management believes it can double the cash flow coming out of the business over the next five years. If it achieves that goal, the stock should compound toward another triple by 2032.
3. Alphabet
It's tough finding decent value among growth tech stocks right now. Investors should consider Alphabet (GOOG +1.21%) (GOOGL +1.28%) -- a wide-moat leader in artificial intelligence (AI) that trades at a reasonable valuation of 25 times earnings.
It's generally a good rule of thumb to buy growth stocks at valuation multiples that are close to, or less than, the underlying growth rate of the business. In Alphabet's case, the search leader reported earnings growth of 70% year over year in the third quarter. Over the last five years, earnings have more than tripled.
Revenue from Google services, including advertising from YouTube and search, has experienced accelerating growth over the last year. Management is making more investments to make its services more helpful to people, including its AI-driven Google Shopping Graph technology, which links over 24 billion products from merchants with people searching on Google.
Alphabet is making big investments in AI technology that is at the heart of the company. As Google gets smarter, it keeps more users coming back to these services, which keeps revenue and profits growing. This is a compounding machine that should deliver a triple to investors over the next decade.
