HOW TO DOUBLE YOUR MONEY YOU CAN DO IT IN A MERE FIVE YEARS IF YOU EARN 15% A YEAR. ACHIEVABLE? YES. BUT IT WON'T BE THE SNAP IT HAS BEEN LATELY. THESE PICKS WILL BRING HOME THAT MUCH OR MORE.
(MONEY Magazine) – Okay. So you've just read that the next 25 years look darn good for savvy investors. But what if you don't feel like waiting around for another couple of decades for your just deserts? What if you'd like your money to, say, double in five years instead of 10, 20 or even 25? After all, the S&P 500 has turned that trick in less than three years, rising 100% since January 1995. Well, the good news is that, though MONEY's investment strategist Michael Sivy and other analysts think the stock market is far more likely to endure at least a 15% dip than to surge further over the next 12 months, there are still selected investments that top money minds believe can turn one dollar into two (or $100,000 into $200,000) over the next five years. Six such potential doublers are described below.
Don't get us wrong: Spinning such a fast "twofer" won't be easy. It seldom is, especially when the prime candidates for making it happen--equities--are as richly priced as most are today. What's more, there's no 11th Commandment stating that stocks shalt only riseth. All great streaks come to an end, and sometime--perhaps even soon--the S&P 500 will stop churning out the 20% annualized gains it has produced in the past five years. "Investors' expectations have to be lowered," says Vernon Winters, chief investment officer at Mellon Private Asset Management in Boston.
We agree. Specifically, it's highly unlikely, says Sivy, that over the next five years equity indexes--the Dow, the S&P 500, the average equity fund--or your entire portfolio will return the 15% a year necessary for you to double your dough. To Sivy, an average gain of 10% or so would be cause for celebration. That said, if you look hard enough you can still find a few sweet peas in today's pod of generally overripe stocks and funds. Says Anthony Chan, chief economist at Banc One Investment Advisors in Columbus, Ohio: "Earning an average annual return of 15% will definitely be a challenge but not impossible."
To come up with our six recommendations--three funds and three stocks--we asked a dozen leading investment pros for their best ideas. Their approach was generally to avoid today's high-priced blue-chip shares and focus on investments they follow that have been overlooked or unfairly shunned by Wall Street during the past few years. "You aren't going to find doubles in the Cokes, Gillettes and other large-cap stocks that have been leading the market," says Alfred Kugel, senior investment strategist at the Chicago investment management firm Stein Roe & Farnham. "You need to look in areas that have been out of favor the past few years, such as small-cap and midcap issues."
That's exactly what our experts did to turn up half a dozen solid choices poised for near-term growth that could propel them to 100% gains within the next five years. We then ran our experts' picks past multiple other investment pros we admire, to make extra-sure their selections were actually as rock-solid as advertised. (If you're interested in more tangible--and dare we say, offbeat--investing ideas that could double over the next five to 10 years, check out the story on page 120.)
One word of warning: Averaging 15% gains given today's elevated equity values means shouldering substantial risk. The investments described in alphabetical order below (first funds, then stocks) should constitute at most 10% or so of your overall portfolio. You get the idea: These choices are not for a kid's college fund that will come due between now and 2002. Nor are they for big hunks of your retirement savings. Rather, they are sound (if aggressive) candidates for your marginal money--for instance, for fresh cash from profits you've taken on some recent winners. Here, then, are six ways to double in five years or less.
DREYFUS MIDCAP VALUE
Sizzling two-year-old fund searches for bargains in mid-size stocks.
TOTAL ASSETS: $77 million
FACTOID: 42% annualized return since September '95 launch is more than double the 20% gain for the average midcap fund.
WHY TO BUY: Small asset base gives manager Peter Higgins plenty of room to continue producing big returns.
The $77 million that manager Peter Higgins, 36, currently invests for Dreyfus MidCap Value (800-373-9387) would barely register as a rounding error at a multibillion-dollar fund. (For instance, it represents less than two-tenths of 1% of the assets that manager Robert Stansky has to deal with at newly shuttered $63 billion Fidelity Magellan.) That small size is a big plus for shareholders looking for a quick double. Reason: It takes fewer winners to propel a small fund than it does to move a mammoth one, and a manager can also effectively exploit small and midcap issues. "Large growth in assets typically hurts a manager's ability to outperform," says Thurman Smith, editor of the monthly Equity Fund Outlook ($125; 617-397-6844). "This fund has the flexibility to continue its strong performance."
Another plus is that while Wall Street covers large caps with a ferocity that leaves few secrets untold, Higgins focuses on less popular firms. By prowling among mid-size stocks with total market values between $400 million and $4 billion, Higgins is often able to scoop the competition. "I'm looking at firms that are too small to be of interest to many analysts," says Higgins. "So if I'm right with my picks, I'll catch the turn in the company before it becomes widely known by Wall Street." Higgins has been right a lot. The fund's 64% rise during the past 12 months is 24 percentage points ahead of the return of the Wilshire index of midcap value stocks.
As you would guess from the word "value" in the fund's name, Higgins searches for underappreciated stocks. The portfolio, which typically holds 100 stocks, currently sports a price-to-book value that is 40% lower than the Wilshire midcap index. This statistic measures the average of the portfolio's per-share market price relative to the per-share worth of each firm's tangible assets. "The idea is to find issues selling at prices that are cheaper than average but that also have better than average growth prospects," says Higgins. Despite the lofty heights of the broad market averages, he says he's got plenty of promising leads at the moment. "There is absolutely no shortage of ideas out there if you are diligent."
Higgins builds his portfolio stock by stock rather than by making broad assumptions about any particular industry or market theme. This approach is reflected in the diversity of his holdings, which include the tech stock Symantec, health-care firm Quest Diagnostics, transportation company U.S. Freightways, camera and film manufacturer Polaroid, and paper company Fort James.
Home builder Kaufman & Broad Home, which garners about half its $2 billion of revenues from its California operations, is a typical Higgins holding. "California was the last region in the country to recover from the economic downturn of the early 1990s. Kaufman & Broad is now just seeing a strong turn in its business," says Higgins, who bought the stock in June 1996 when it was wallowing at $14.50 a share. The stock now trades at $20 a share, but Higgins figures the best is yet to come. He expects earnings to jump from $1.90 in 1998 to $3 in 1999; that could push the stock toward $30. That's just the sort of big winner that can help a portfolio reach for a five-year double.
MONTGOMERY EMERGING MARKETS
Globetrotting fund that spreads its bets to keep risks lower than those of its average peer
TOTAL ASSETS: $1.3 billion
FACTOID: Ranks in the top 30% of emerging markets funds over the past five years
WHY TO BUY: Senior managers Jimenez and Sudweeks have a knack for delivering top returns at below-average risk.
As you read in the previous article, the next 25 years will see a rapid expansion in the economies of many developing countries. Better yet, emerging markets investments should be especially profitable during the next five years. "For a double you need to look to international markets, especially emerging markets," says Ed Goldfarb, director of research at Kobren Insight Management in Wellesley, Mass. "Emerging markets haven't had the run-up of the U.S. market. Yet the economies are growing at a strong rate, corporate earnings are also growing, and inflation rates are coming down. That makes it look like emerging markets are in for some strong performance."
Goldfarb says the diversified no-load Montgomery Emerging Markets fund (800-572-3863) is a smart way to tap into the powerful growth potential of nascent economies throughout the world. He likes the firm's ability to manage risk and still post strong returns, as well as its strong research team, which widens its hunt for great values into relatively undiscovered markets such as Eastern Europe, Africa and the Mideast.
Co-senior managers Josephine Jimenez and Bryan Sudweeks, both 43, own 220 stocks spread across 30 countries. They tend to buy a combination of large-cap issues that offer great liquidity in addition to small-cap issues that aren't as well covered by market analysts. Says Stan Luxenberg, editor of the monthly Critical Investor fund newsletter ($99; 800-494-6377): "What I like about Montgomery is that it is so broadly diversified that you have a bit more stability than with other emerging markets funds, while still having a strong shot at that 15%."
Jimenez and Sudweeks spread their bets to lessen the negative impact any one stock or country could have on the portfolio. After all, in volatile emerging markets, double-digit losses--and gains too--can materialize with stunning speed and force. So far the strategy has paid off. According to Morningstar, the fund's five-year risk score--which measures how often and by how much the fund's monthly performance trailed the return of risk-free U.S. Treasury bills--is 15% below the average for diversified emerging markets portfolios. The trade-off for lower risk is that Montgomery will rarely lead the pack in a roaring market. But that doesn't mean it's a dog that won't hunt. The fund gained 59% in 1993 and is up a strong 20% for the first eight months of 1997, which puts it in the top third of emerging markets funds.
Brazil currently commands 18% of fund assets, the single largest country bet in the $1.3 billion portfolio. Jimenez says the management team was not scared off by the 15% decline in the Brazilian market in one week last July. "It's just nervousness by currency traders who saw what happened in Southeast Asia," says Jimenez, referring to a July currency crisis in Thailand that required a bailout by the International Monetary Fund. "But Brazil is a completely different story. Economic reforms have worked, exports are rising, and there is a tremendous amount of privatization taking place over the next few years that will create strong foreign investment." She says the Brazilian market could samba to a 30% return over the next 12 months.
Another 10% of fund assets are invested in Russia. Yes, Russia. "There have been strong market reforms, and capitalism is truly growing," says Jimenez. "Breadlines have been replaced by thriving small enterprises." The Montgomery team isn't playing roulette and betting its Russian stake on tiny firms. Instead, it has aimed at large energy firms, such as Irkutskenergo, a Siberian hydroelectric firm, and Lukoil. "Russia's energy sector is going to get a boost from China, which needs to import energy to continue its rapid economic expansion," says Jimenez. The broadly diversified Montgomery portfolio looks fully energized to deliver a five-year double.
Hot new no-load value fund from the team whose flagship portfolio is in the top 1% of funds for the past 10 years
TOTAL ASSETS: $400 million
FACTOID: Fund is up 48% since its November '96 inception vs. its average peer's 29% gain.
WHY TO BUY: Manager Bill Nygren and his research team are the Chicago Bulls of value investing.
Belying his mild-mannered persona, manager Bill Nygren's investment approach is all about maximum impact. His 11-month-old Oakmark Select (800-625-6275) invests in fewer than 20 stocks--compared with 120 for the average stock fund--and the top five holdings typically account for 50% of fund assets. The portfolio currently contains just 17 issues; $8 billion Tele-Communications/Liberty Media hogs the top spot with 15% of portfolio assets. "Taking big bets is a smart way to have a shot at earning a 15% return," says Eric Kobren, portfolio manager at Kobren Insight Funds, which invests clients' assets in mutual funds. "And the Oakmark team certainly knows how to pick stocks."
You can say that again. Nygren, 39, has been director of research at the fund's adviser, Harris Associates, since 1990. His seven-member research team has generated investment ideas for the firm's flagship $4 billion Oakmark fund since its 1991 inception; their picks have helped propel Oakmark to a 31% annualized return, compared with the 17.9% rise of the S&P 500. That puts it in the top 1% of equity funds during that stretch.
For Select, Nygren and his crew look for mid-size and large stocks (with total market values of at least $1 billion) that they calculate are currently selling for at least one-third less than their intrinsic value. According to fund research firm Morningstar, Select's price-to-book value is 45% below the average for midcap value funds. Translation: Select owns stocks at bargain-basement prices.
Yet Nygren invests only in firms in which he believes something will propel the stock from today's chump to tomorrow's champ. For example, nearly 9% of fund assets--the portfolio's third largest position--are invested in $2.8 billion USG Corp., the biggest and lowest-cost U.S. producer of gypsum wallboard used for home construction. When USG emerged from bankruptcy two years ago, Nygren spied a classic opportunity to play a rebound.
USG's management had a clear focus: It had decided to spend half its annual cash flow to aggressively pay off its debt and the other half on capital expenditures that will increase plant efficiency. "I've got a financially improving firm that is selling at a 60% discount to the market, and it is close to having its debt upgraded from junk to investment grade," Nygren says. "The reasons for not wanting to invest are disappearing, and Wall Street should eventually notice that."
Tim Medley, a financial adviser in Jackson, Miss. who invests clients' assets in mutual funds, including Oakmark Select, is a big fan of Nygren's team. "They put all their effort into their best ideas, rather than fill the portfolio with stocks they are less enthusiastic about," he says. Potential shareholders should also be enthusiastic about the fact that Nygren has more than professional pride riding on his team's stock- picking acumen: The majority of his personal net worth is invested in the fund.
A volatile closed-end fund that specializes in Asia's roaring-tiger economies
TOTAL ASSETS: $272 million
FACTOID: Oldest Asia-only closed-end fund sports five-year return in the top 15% of peers.
WHY TO BUY: Great play on one of the world's fastest-growing regions, and you can get $1 of stock for 80 [cents].
We're loyal to prognosticators who have steered us well in the past, so we put in a phone call to Michael Porter, the closed-end fund analyst at Smith Barney. In 1991, Porter told us the Brazil Fund was primed for a double. The closed-end portfolio indeed delivered a 135% gain--in just two years.
Closed-end funds trade on exchanges like a stock, at prices that are set by supply and demand. As such, the price can be greater or less than the per-share value of the portfolio's investments, which is called the net asset value (NAV). Closed-ends that sell at a discount are prime targets for doubles; if the portfolio performs well and investors notice, the net asset value of the fund goes up and the discount shrinks or even becomes a premium. "The key to getting a double is to buy a closed-end fund that is greeted with pessimism now but has plenty of upside," says Porter.
A top Porter double candidate is the Asia Pacific fund (ticker symbol: APB; recently traded on the New York Stock Exchange at $11.75), which currently trades at a 20% discount to its NAV. As with our pick of the open-end Montgomery fund, Asia Pacific is on course to play a strong rally. "Emerging markets have lagged those of the U.S. for the past three years," says Porter, "but they are growing economies. That discount offers a lot of value as the markets rebound and the discount closes." In fact, Asia Pacific isn't accustomed to trading at a discount; from 1992 through 1995 the portfolio traded at a double-digit premium.
The 101-stock portfolio is managed by David Brennan of Baring International Investments in Hong Kong. He currently has 42% of fund assets invested in Hong Kong, followed by 19% in Malaysia and 14% in Singapore. Brennan scouts around for undervalued issues; the portfolio's price/earnings ratio and price/book ratio both are one-third below the average for the Morgan Stanley index that tracks Pacific markets excluding Japan.
Baring is admired for its fastidious research process. Says Rory Costello, a closed-end fund analyst at Prudential Securities: "Disclosure standards in Asia aren't as stringent as here in the U.S., so it is very important to visit any company you are researching to make sure what you see is really what you get. Baring does all that important legwork. They really know the companies they invest in."
Potential investors should be aware that Asia Pacific is prone to more swirls and twirls than a dragon's tail in a Chinese New Year's parade. In 1989 it gained 181%, followed by a 37% slide in 1990. In 1993 the portfolio raced to a 107% return, only to skid to a 35% loss in 1994. Despite the middling performance of the past three years--a 4% gain in 1995, a 7% loss in 1996 and a 5% slide so far this year--the portfolio seems primed for a couple of big runs that could produce a double within the next five years.
DEERE & CO.
The Queen of Moline is the world's largest manufacturer of farm equipment.
1997 REVENUES: $10.6 billion
FACTOID: Operating margins improved from 3.1% in 1992 to an impressive 12.8%.
WHY TO BUY: Great world-brand manufacturer with superb growth prospects but still selling at a below-market price
For a double-your-money story we published in May 1995, Susan Byrne, manager of $120 million Westwood Equity Fund, told us about two stocks she believed could rise 100% in five years. Less than 2 1/2 years later her choices--Boeing and Lockheed Martin--are up 105% and 100%, respectively. With that phenomenal performance in mind, we went back to Byrne to see what she believes is double material today.
Her top pick is $10.6 billion Deere & Co. (DE; NYSE; $55). "This is an extremely well-managed company that is selling at a steep discount to the market," says Byrne. She is especially keen on the farm equipment manufacturer's growth prospects in emerging economies. "When investors talk about brand recognition in emerging markets, they overstress the consumer names like Gillette and Coke. But Deere is just as much a branded global leader in its field, and it is a strong play on the rising disposable incomes of farmers."
Goldman Sachs analyst Roger Sit agrees. "Deere is the Good Housekeeping Seal of Approval in farm equipment," he says. "And keep in mind that Deere gets only 15% to 20% of its earnings from overseas now, so there's plenty of room for growth."
Another plus is that global population growth of 2% a year is pushing up the demand for food, and the rising personal income of individuals in developing countries is also causing an upgrade in diet, especially meat. To produce one pound of meat can require as much as seven pounds of grain. That means farmers around the world need to increase their productivity, which in turn means they need to increase and improve their capital equipment. That's great news for the Moline, Ill. firm's bottom line, where profits rose at an average rate of 18% over the past five years.
Potential Deere investors should love the fact that while Gillette and Coke currently trade at P/E ratios of 45 and 32, respectively, Deere's P/E of 16 is 25% lower than the market average of 20.9. Says Sit: "The P/E ratio can't really go down from here and has a lot of upside." Byrne expects Deere to boost earnings at least 15% a year and the stock price to follow suit. That's enough for a double by itself. Plus, Deere produces a 1.5% dividend yield. Throw that into the total-return mix, and Deere is well positioned to feed investors a double in five years.
U.S. FILTER CORP.
Leading producer of water filtration and purification systems for municipal and industrial use
1997 REVENUES: $2.5 billion
FACTOID: Sales are up more than threefold in just the past three years.
WHY TO BUY: Strongest player in a business growing about 10% a year
Water is one compelling liquid asset. Less than half of 1% of all water on earth is usable and fresh, yet demand for H20 by individuals as well as corporations who use it in manufacturing is practically insatiable.
That has created a tremendous market for $2.5 billion U.S. Filter Corp. (USF; NYSE; $32). The Palm Desert, Calif. outfit is the market leader in manufacturing filtration and purification systems for industrial water use, as well as in designing systems for municipal water treatment. It also recently opened five retail stores to sell home-filtration systems and bottled water to individuals. "U.S. Filter is the first name that comes to my mind when I think of stocks that should double. It is the one-stop shop for the equipment and services related to water filtration and purification," says Jeffrey Robins, an analyst at Gruntal & Co.
And that's a growing business. Robins says the $300 billion industry should grow to $500 billion by 2002. While usf is the leading firm in the industry, it controls just 2% of the fragmented market. "There is plenty of room for usf to grow," says Robins. That's a sentiment echoed by Hugh Johnson, chief investment strategist at First Albany: "U.S. Filter will be extremely profitable over the next five years."
Another positive sign for potential shareholders is that usf recently caught the attention of prominent Texas investors Lee and Ed Bass. The brothers sold nearly 50,000 acres of Southern California and Texas land--and its water rights--to usf and in return received 8 million usf shares. With 9% of outstanding shares, the Bass brothers are now usf's single largest shareholder. And the duo also own warrants to purchase an additional 600,000 shares at $50 and another 600,000 shares at $60. The current stock price is $36, so it's easy to see that the Bass brothers are thinking double too.
Robins expects annual earnings growth to average 25% or so over the next five years, though strong performance over the next two years could push profits up more than 40%. Yet the company currently trades at a reasonable 20 times Robins' 1998 earnings estimate of $1.80 a share. For investors who are thirsting for 100% gains over the next five years, usf--along with the five other investments mentioned above--should be the perfect thirst quencher. Just don't be surprised if a little success whets your appetite for more.
Reporter associate: Malcolm Fitch