How to find stocks which will double your money

By: Matthew Bettison
It's an investor's dream: A stock with the potential to double in price.

Finding these stock market jewels before they double is difficult but not impossible. According to data provider Capital IQ, there are almost 6,700 stocks that trade on major U.S. exchanges, and less than 100, or 1.4%, have doubled in the past year.

Still, this rare breed is worth hunting. Recently BusinessWeek asked fund managers and other market experts to pick stocks that could provide 100% returns in the next couple years. They only managed to choose sixteen which they had confidence in.

It's possible none of the companies will meet their recommenders' highest hopes. Not only are there long odds against any one stock doubling but the market faces rocky conditions amid a tough economy and a persistent financial crisis. Also, the 16 stocks named by their experts include some unproven, volatile names, reflecting the fact that investors hoping for big returns also must take major risks.

Taking those caveats into account, how can you find stocks that could double? Everyone has a different strategy, but all look for ways to outsmart an efficient market.

The First area is startup companies in the small-cap segment; for one thing, "nobody knows much about them," this gives investors a chance to spot great prospects before the rest of the market sees them. Also, many small companies are growing by exploiting a particular niche. "The good ones have figured out strategies that get them to grow no matter what happens to the economy,"

Many investors crunch the numbers themselves looking for promising companies trading at bargain basement prices. One stock recommended, specialty chemical firm OM Group (OMG), is growing more quickly than Apple (AAPL) but trades at just a fraction of Apple's high p-e.

But other advisors don't like a strategy focused entirely on value. Investing in cheap stocks can be very risky, depending on where the economy is going. Instead they use technical analysis—the study of a stock's movement in the market—to find their favorites. Using this method software companies Ansys (ANSS) and IHS (IHS) look good at the time of writing this article.

Further experts on technical analysis, says it's a good sign if market data indicate a lot of negativity toward a particular stock. For example, a lot of short interest in a stock—i.e., investors betting the price will fall—can actually help a stock rally quickly if a rising share price forces short sellers to buy back shares.

Currently glassmaker Apogee Enterprises (APOG) and Volterra Semiconductor (VLTR), both face a lot of market pessimism and so would be worth considering.
Of course, when stocks fall out of favor with the market, it's mostly for good reasons. The trick then is to look for stocks selling at a discount for bad reasons. Good examples are Chicago Bridge & Iron (CBI) and Jabil Circuit (JBL) which could double, proving their doubters wrong.

Despite the risky environment, a savvy few believe this is the perfect time to be hunting for stocks with large upside potential. With the broad Standard & Poor's 500-stock index down over 10% in the past seven months, many stocks are trading at bargain prices.