How to Find 100-to-1 Moonshots

 | Oct 14, 2016 | 3:00 PM EDT
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Some readers ask for my list of potential 100-to-1 stocks that I am watching for a great entry point. To answer those questions, I will use Thomas Phelps' 1972 book "100 to 1 in the Stock Market." He was looking for stocks that could provide moonshot returns over periods as long as 40 years. In other words, 100-to-1 stocks are either for young people aiming to build a comfortable retirement or older folks hoping to leave something for children and grandchildren.

This approach requires a lot of patience and almost total ignorance of day-to-day market movements. As long as the company and the sector are going in the right direction you will want just to hold the stock, reinvest any dividends and just let time, demographics and economics do the heavy lifting.

The most prominent area for 100-to-1 shots is cyber security. We are moving into a very mobile world, and anything mobile is hackable. That includes the bright new world of driverless cars. Companies that offer protection for this new technology will enjoy long-term returns. So far I only own Unisys (UIS) as I think their Stealth cybersecurity product will be a market leader, particularly with financial services firms. I have to imagine that companies like Vasco Data Security International (VDSI) , Symantec (SYMC) , Barracuda (CUDA) , Palo Alto (PANW) and Cisco (CSCO)  , which is a holding in Jim Cramer's Action Alerts PLUS portfolio, will also get their share of the cyber market, but they are not at attractive price points. I will have to wait for a bad market to add these to my 100-to-1 stash.

Environmental cleanup companies also have 100-to-1 potential. The world population is growing and will most likely continue to do so for the next 40 years. People make trash and trash has to be cleaned up. We need a sale to be buyers here, but in the next bear attack, companies like Ecology and Environmental (EEI) , Republic Services (RSG) , US Ecology (ECOL) and Covanta (CVA) are going to be worth buying for a 100-to-1 portfolio.

Energy infrastructure is also an area I consider ripe for 100-to-1 returns. Companies that build the new facilities for renewable energy, including nuclear, will see steady business for decades to come. Companies like Fluor (FLR) , Argan (AGX) , Aecom  (ACM) , Chicago Bridge & Iron (CBI) , and Jacobs Engineering Group (JEC) have the potential for 100-to-1 long-term returns, particularly if you are patient and buy them at bargain prices.

One sector that is capable of 100-to-1 reruns and has done exactly that over the past 40 years is equity REITs. REITS listed with the National Association of Real Estate Investment Trusts have averaged 12.83% growth in the 40-year period ended in December 2014. In other words, $1 invested for 40 years at 12.83% grows to $125.02. Buying REITs like Colony Capital (CLNY) , Equity Commonwealth (EQC) , First Potomac Realty Trust (FPO) and others when they are on sale, reinvesting the dividends and just ignoring them for a few decades should be a wildly profitable venture.

Water infrastructure is going to be a big concern and businesses like Mueller Water Products (MWA) , Layne Christenson (LAYN) and Northwest Pipe (NWPX) could easily see massive long-term returns as billions are spent to update and expand the world's water delivery and management system.

Other sectors that offer potential 100-to-1 returns are healthcare and education technology.

The best way to discover 100-to-1 opportunities is to sit in a quiet room, imagine the world 40 years from now and think about what products and services will be needed to get us there. Identify the companies that provide those things and wait for a chance to buy them at bargain prices. Once you own them, forget about them. Check their financial condition once in a while and as long as they remain financially viable don't even think about them day to day. Let time do its job.

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