Every investor?s dream is to buy into a stock that doubles in price. We?re not looking for a bank account interest gain – we want to see that magic 100% increase. It?s attractive, yet elusive for many who don?t have the patience to wait for a company to grow in price naturally.
What kind of annual return would you need to double your money in five years? Many investors may know about the ?rule of 72?, but just to be sure, here it is. If you want to know how long it will take to double your money in a…
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Every investor’s dream is to buy into a stock that doubles in price. We’re not looking for a bank account interest gain – we want to see that magic 100% increase. It’s attractive, yet elusive for many who don’t have the patience to wait for a company to grow in price naturally.
What kind of annual return would you need to double your money in five years? Many investors may know about the “rule of 72”, but just to be sure, here it is. If you want to know how long it will take to double your money in a certain number of years, you simply divide the number 72 by the rate of return you project to get and that will give you an approximate answer.
For example, at a 10% per year rate of return, it would take 7.2 years to double your money (72 divided by 10).
Oppositely, if you want to double your money in a particular number of years, you simply divide 72 by the number of years and the answer is the compounded annual rate of return you will need. To double our money in five years, we would need a 14.4% annual rate of return.
Similarly, if a stock can increase its earnings per share by about 15% annually, then it could double earnings within that time. There are companies that have been raising their EPS by that and more, so it is possible. Whether they can keep it up over a long time is another question, though.
Here are some companies that could double earnings over the next five years at their present rate and trend.
Ramsay Health Care Limited (ASX: RHC)
The private hospital operator raised its EPS 17.2% in 2013 and its five-year compounded annual growth rate is about 17%. The analyst consensus two-year forecast is for an annual 17.2% EPS increase. Its PE now is 28.6.
REA Group Limited (ASX: REA)
The realestate.com.au property listings website operator grew EPS 25.8% in 2013. Its five-year compounded growth rate was an average annual 36.5% and the two-year analyst forecast is for EPS growth of an average annual 35.2%. That is about double the necessary rate of return, but that is why the stock’s PE is 43 now.
Domino’s Pizza Enterprises Ltd (ASX: DMP)
The takeaway pizza retailer was a little under the wire in 2013 at about 14% EPS growth, yet the past five-year compounded annual average was 19.1%. It’s projected by analyst consensus forecast to raise EPS by an average annual compounded rate of 23.5% over the next two years. It has a 40 PE currently.
Five years may sound like an eternity. For long-term investors, five is only mid-term, so it isn’t a big stretch. At the rate these companies are going now, they could possibly double earnings in the next five years.
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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.