Buying shares and watching them double in under a year is something a lot of investors dream of. Many of us watch other people choose shares which double or triple in a year, while our own portfolio doesn’t even perform as well as the market. In hopes of learnings to spot telltale signs of shares that can double in 2021, I looked back at shares which did it last year to see what I could learn.
Spotting market trends just in time
Shares in electrical retailer AO World had a very strong 2020, more than tripling at one point towards the end of the year. What’s interesting to me about the company’s strong performance is that, while people staying at home during the pandemic was an accelerator to online purchases, that seems like it shouldn’t have been a surprise. AO World had been accelerating revenue selling appliances online for years. The pandemic saw demand increase, but in hindsight that seems like something that could have been easy to guess at the start of lockdown. So it would have been possible to ride the AO World rise without a crystal ball or expert insight – just reading a newspaper.
So in 2021, I am paying attention to trends which I think could transform the fortunes of sectors of the economy. Then I will look for any deep value shares that can double within those sectors.
Shares that can double by riding cyclical demand curves
Some industries have fairly smooth or predictable demand, such as food processing and clothing. Others are very cyclical. That means that they go though cycles where demand increases and prices shoot up, before crashing later on.
That might sound odd, but there’s a reason for it. Industries such as mining and energy require huge capital expenditures. When the commodity price is low, companies tighten their belts and cut back developing new projects. Such projects take years to develop, so when demand outstrips supply again, the price can rise sharply. As the spending was cut before, supply becomes insufficient so prices keep rising. That encourages a rush to develop supply, which later leads to a glut. Prices fall and the whole cycle starts again.
Last year, Glencore shares doubled from their March lows. Even though the mining giant’s results were mixed, investors were looking forward to the prospects of demand recovery and higher prices. I now scan the horizon to see what commodity cycles are set to improve.
Hunting for value
A rear view mirror is not a crystal ball. So shares which doubled in 2020 might not even do well in 2021. For example, I think AO World is quite highly priced for now and I wouldn’t buy it today. However, the principles of what led to shares doubling before can be rewarding to study. I find it helps me have a better framework to use when researching shares that can double in 2021.
Instead of just looking for shares driven by momentum, I prefer to hunt for real value. That means a share which has a good underlying business which clicks with its customers, but whose prospects have been mispriced by the market. Sometimes it doesn’t work and shares with low prices stay stubbornly low. But sometimes, carefully researching and picking the right shares, they really can double.
The post Shares that can double in 2021 – some pointers I look for appeared first on The Motley Fool UK.
christopherruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2021