Just like any other young investor, my financial goals skew towards wealth creation rather than capital preservation or stable income. I’m genuinely unconcerned if the stocks I buy don’t pay dividends or have a higher risk profile than the well-established blue-chips.
This year I’m focusing on creating a portfolio that has the potential to double within three years. I’ll be the first to admit this is a lofty goal, verging on the impossible. No one can predict if a stock or portfolio will double within any time frame with certainty. But even if I fail, I reckon I’ll be left with a reasonably decent basket of long-term growth stocks.
With that in mind, here’s my game plan:
What does it take to double an investment?
A professional investor once pointed out that there are only three sources of return for any shareholder — income yield, income growth and valuation adjustment. A combination of these key factors will have to come together to create a desired minimum return for my portfolio.
Based on my calculations, that desired return should be pegged at 26.6% or more, compounded annually. That’s the rate required to double an investment within three years.
My top picks
Striking that 26.6% compounded annual growth rate (CAGR) target isn’t easy, but it’s far from impossible. Hyper-growth stocks, usually small-cap technology companies or software providers, have a track record of double-digit growth. I managed to find at least a dozen stocks that fit the bill, but two stood out as clear favourites — D4T4 Solutions (LSE: D4T4) and Softcat (LSE: SCT).
Data solutions provider D4T4 is at the forefront of a revolution that I believe will be immensely lucrative over the next decade. Corporations of all sizes will have to collect and manage much more data as the economy gets more digital. Managing this persistently accumulating data will soon be imperative.
D4T4 provides software platforms that can help these companies collect customer data, store it safely for regulatory or system security reasons, and analyse it to drive their business forward. The company’s software suite is currently being used by major corporations like HSBC, the NHS, and Qantas.
Over the past year, the company’s revenue is up 36.9% and adjusted diluted earnings per share is up 57.5%. Meanwhile, the stock trades at a forward-price-to-earnings (P/E) ratio of just 16.3. All factors that easily surpass my minimum requirements.
Similarly, IT infrastructure specialist Softcat manages to pull off a high growth rate with incredible margins. Neil Woodford held the stock for a while and most likely doubled his investment last year. Now, I believe the company is poised for more expansion and the stock could be an integral part of my growth-oriented portfolio.
Softcat is an integrated information technology management company, which means it helps manage the entire backend infrastructure for its clients. Last year, the company served over 11,900 clients and generated an average profit of £14,700 per client.
Over the course of the year, Softcat’s revenue, gross profit and operating profit expanded by 30%, 29% and 36% respectively. The stock, meanwhile, is up 116% over the past three years. Its P/E ratio of 34.4 seems justified to me, considering the company’s phenomenal rate of growth. It certainly has the potential to double my investment again by 2022.