Every investor would love to see a stock they own double in value, but a 100% gain does not happen overnight.
For instance, shares of taxi operator ComfortDelGro Corporation Limited (SGX: C52) have delivered total returns of 200% for investors. But the returns occurred over a period of a decade.
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At a basic level, the example above tells us two things: First, we have to find the right company to buy. Then, we have to have the resolve to hold the company for the long term, through thick and thin.
Finding the courage to hold onto stocks is not as simple as it looks.
Courage, principles, and multibaggers
Our analyst team works closely with fellow analysts and investors from our Motley Fool headquarters, such as Jeff Fischer.
Jeff Fischer has a long tenure with The Motley Fool. He first started writing online for the Fool in 1996. Today, we would like to help you, our fellow investor, with five principles that we have gleaned from Jeff’s decades of writing.
We have shared four rock-solid principles from Jeff so far.
As a brief recap, a desirable company has recurring revenue, an expanding growth runway and a powerful moat protecting its business. And to separate the best of the bunch, we can look for customers which keep coming back for more of a company’s products or services.
On that note, we will close the fifth and final principle of our series which delves into a stock’s valuation.
Principle #1: Predictable or Recurring Revenue – click here
Principle #2: Expanding Market Opportunities – click here
Principle #3: Evidence of a Competitive Moat, and Financial Resilience – click here
Principle #4: Modest Decision Threshold – click here
Principle #5: Reasonable Total Company Value
What is reasonable? That’s not easy to answer. We look for companies operating in industries much larger than their market cap because this provides our companies a better chance to grow strongly for years to come.
When we look at valuation, we look at our company’s sales compared to potential industry sales. And we look at our company’s free cash flow and earnings compared to its market cap. If we believe our companies can grow sales around 20% annualised for years to come, a 20 to 30 valuation multiple to its free cash flow is often considered reasonable.
But younger companies may not have any cash flow or earnings at all, and in those cases we rely on our other four principles to eventually carry the business to profitability. That means counting on its total value – or market capitalisation — today being much smaller than its market opportunity.
So, we contrast a company’s total value on the stock market with its market’s potential, and we need to see a lot of room for its price to grow.
Towards lifelong learning…
So, there you have it. Over the past five days, we have shared five powerful signs that a stock could have the potential to double.
But we are not done yet. Before I sign off, I am proud to share that our stock recommendation service, Stock Advisor Singapore, has uncovered two companies that have delivered 100% returns in less than two years. And these two multi-bagging stocks have Jeff’s principles written all over them.
Their names, including the full research reports, are available inside our flagship stock recommendation service Stock Advisor Singapore. In fact, we have over 30 recommendations ready for you to consider buying now.
Click here to find out how you can get access today.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore writer Chin Hui Leong does not own shares in the companies mentioned.