Here at Agora Towers the team and I are working on a new project. I can’t tell you a whole lot about it yet – it’s still a month or two from completion. But I can share some of the research that’s gone into it.
Over at The Investor’s Field Guide, Patrick O’Shaughnessy has been researching the same corner of the stock market as me. He’s crunched the numbers and come up with some interesting answers to the question: what sort of stocks triple in one year?
What to look for
His research is limited to the US markets, but it still gives a good flavour of the sorts of companies to look for.
The one important catch is that he avoids the very smallest companies. Small caps and micro caps are the types of company most likely to triple in value in a year, so it’s an important catch. But nonetheless it gives a good insight into what industries to watch out for, and when to expect returns.
There have been 1,700 instances of a stock tripling in value in one year since 1962. Studying those stocks, he finds they have three things in common.
They are clustered around specific dates. The richest pickings are found at the bottom of a bear market, like when the market “turned the corner” in 2009, and also at the very top of a huge bull market, like in 1999. The takeaway here is that triples don’t happen regularly and predictably. You wait for them, and then they all come at once.
They’re way more common in the technology industry than any other. Technology makes up 38% of all triples. Nine industries make up the other 62%: healthcare, consumer discretionary, industrials, energy, financials, materials, telecoms, consumer staples and utilities. Obviously the dotcom boom played a big part in that. But even if you take that period out of the sample, technology companies still dominate.
Lately, biotech has taken over from technology. The science of biotechnology has raced ahead in the last five years or so, and it’s taken the valuations of biotech companies along with it.
The next finding is counterintuitive: triples tend to be expensive at the start of their run. In other words, don’t buy beaten-up value stocks hoping things will turn around quickly. Triples tend to be good companies which outperform high expectations – not average companies which outperform low expectations.
The last finding won’t be a surprise to anyone who’s been reading Risk and Reward for long: triples tend to be small. Large cap stocks occasionally triple in value, but they’re beaten in all time periods by small caps.
So what’s the takeaway? If you’re hunting for triples, you ought to look for small cap stocks, in the technology or biotechnology sector, at the bottom of a bear market – and be willing to pay for quality.
It’s not a magic formula. There are plenty of success stories which don’t match one or more of those characteristics. But that’s the combination which has worked most often in the past.
I’ll be in touch again in a couple of weeks about my new project.