Since 1962, a total of 1,700 stocks (not including the tiny ones) have tripled in a 12-month period…

If we wanted to find the next stock to triple in 12 months, what should we do?

[ad#Google Adsense 336×280-IA]I say we should crunch some numbers to find out what stocks that triple in a year look like.

Fortunately, that work has already been done for us, by a few guys that I respect as much as anyone. I’m talking about the O’Shaughnessys.

Let me tell you why I trust them, and what they discovered about stocks that triple…

I consider What Works on Wall Street one of the most important books in Wall Street history.

No, it’s not a thrilling page-turner. But it’s full of numbers – very important numbers.

The author, Jim O’Shaughnessy of O’Shaughnessy Asset Management, tested every major strategy for investing in stocks over the last 50 years.

Here’s how he did it… He had access to the deepest U.S. stock market database. And he tested every well-known stock-investing strategy (and many that were not so well-known) to find out what really works. He shared his results with the world in his book. (Thank you, Jim!)

Jim’s son, Patrick O’Shaughnessy, is a chip off the old block…

He works with his dad as a portfolio manager at O’Shaughnessy Asset Management. Like his dad, Patrick likes to crunch numbers.

Earlier this year, Patrick wrote a blog post called “Stocks That Triple in One Year.” Patrick did the math and found that 1,700 U.S.-traded stocks have tripled within one year since 1962 (excluding those less than $200 million in market value, adjusted for inflation).

He found that stocks that triple in a year have three things in common:

  1. They are clustered around specific dates/markets,
  2. They are concentrated in certain sectors, and
  3. They are, on average, small and expensive at the start of their run.

When I saw these shared characteristics, the first thing that came to my mind was the dot-com era of the late 1990s. Back then…

  • Many stocks soared in 1998-1999. (That’s No. 1 – a “cluster” of big winners.)
  • These big winners were almost exclusively tech stocks. (That’s No. 2 – concentrated in a sector.)
  • They were small and wildly expensive (because they had no earnings) before they soared. (That’s No. 3.)

The dot-com era was a classic example of what Patrick discovered. But it wasn’t the only “cluster” of occurrences…

He also found that the cluster of big winners in the U.S. typically happened after a dramatic fall in the stock market.

The most recent example was in 2009. After stocks fell dramatically in 2008, a specific cluster of stocks tripled within the following year.

So… which sector in the U.S. historically has the most winners? By far, the tech sector…

Patrick’s research uncovered a surprising conclusion:

Even if you remove 1997, 1998, and 1999 from the sample, tech still has the most three-baggers. Recently, it has been all biotech companies.

To maximize our chances of finding a stock that could triple in the next 12 months, we should follow Patrick’s formula. We need the following…

  1. A market/sector that has fallen a lot to give us the optimal setup.
  2. A look at tech and biotech, as that’s where the most winners have come from.
  3. A specific focus on the smaller companies. In short, Big Tech companies like Microsoft (MSFT) aren’t likely to triple within 12 months.

Patrick sums up what he learned:

Your best odds (if history repeats) are in technology or biotech stocks, many of which are hard to understand and have binary outcomes… You’ll probably have to buy with little to no margin of safety because these companies tend to trade at very expensive valuations. Good luck, you’ll need lots of it!

(You can read more from Patrick right here.)

Right now, the place we should be looking for triple-digit gains is in small-cap biotech companies. Today, they meet all of Patrick’s criteria…

  1. They’re down 50% peak to trough since July 2015,
  2. They’re in the sector where most winners have come from, and
  3. They’re the smaller names, not the Amgens (AMGN) of the world.

As Patrick says, good luck – you’ll need lots of it – to find a stock that triples. But fishing in the small-cap biotech pond might be your best chance of landing the big one…

Good investing,

Steve

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Source: Daily Wealth