Multiyear Approach Can Bring Big Gains

 | Jun 05, 2013 | 1:00 PM EDT
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If you were presented with one investment option that offered a 10% return for the next year and another option that offered no returns for the first two years, but a 65% return in year three, you wouldn't hesitate to pick the latter choice.

Under the first scenario after three years, a $100,000 investment would be worth about $132,000 while the second scenario would be worth $165,000.

Why would I even ask such a question that clearly comes with such an obvious answer? In reality, most market participants invest in a manner that delivers the lower return at the expense of a better return. It happens when the attempt is made to generate the big returns by constantly trading in and out of positions instead of buying something undervalued and just letting time work its magic.

The key is to buy at an undervalued price. If you had bought Bank of America (BAC) five years ago at the height of the lending boom, you would be sitting on a 55% decline today. Had you bought BofA at the end of 2011 when the shares had been decimated, you would be enjoying a 110%, or more, return on invested capital.

I like to examine the Value Line stock screen that searches for stocks with the highest three-to-five year price appreciation potential. I'm always interested in researching stocks that are deemed to have the potential of advancing by 100% or more over the next three to five years. After all a 100% gain in five years is approximately a 15% annualized rate of return.

The names that show up now are not today's darling stocks -- far from it. I'm not surprised!  Today's triple digit winners -- housing stocks, financials -- were the hated stocks of a couple of years ago. Buy on the fear and sell on the greed, someone once said.

The biggest steel company in the world, ArcelorMittal (MT), currently trades for $12.75. The steel industry is struggling and Europe, one of Mittal's biggest markets, is in a recession. Five years ago, shares traded for over $100. Value Line predicts shares to trade between $25 and $35 over the next 3-to-5 years, a potential return of 75% to 145%.

An interesting name that shows up is Facebook (FB), which is predicted to trade for as much as $65 in the next several years compared to a current price of $23.40.

One of the biggest opportunities is small-cap Casella Waste Systems (CWST), currently trading for $4 or a market cap of $160 million. Value Line sees potential earnings per share of 40 cents a share in 2014 and up to 80 cents a share a couple years later. This led to a price prediction of $12 to $20 a share over the next three to five years, equal to a 200% to 400% gain.  

It's difficult enough to predict a company's performance next year, much yet three years from now. But any investor with more than a passing interest in investing can never go wrong spending a few hours examining an opportunity with the potential of doubling or tripling your money during a multiyear holding period.

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