I’m always on the lookout for shares that can double in price, as most investors would be. On one level the question “can this share double is price?” is an easy one to answer, as most will do so given enough time. But obviously, what we’re looking for is a relatively short timescale — and one place to look is among shares whose prices have crashed to find those with recovery potential.
Black horse
One of my top picks is Lloyds Banking Group (LSE: LLOY), whose shares are still way down from their pre-crash peak. But we’ve already seen a trebling of the price since the lowly days of late 2011 to 68p, and the shares still look to be on a very low valuation.
Earnings per share (EPS) should fall this year, but a P/E of nine certainly takes account of that, and EPS should level out in 2017. Lloyds was back to paying a significant dividend yield of 3.1% in 2015, with big jumps to 6.1% and 7.2% pencilled-in for this year and next — I think the 5p per share predicted for 2017 could be a little imprudent, but it will be very attractive to income seekers.
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We’re facing uncertainty of the extent of any future fines for bad practice, with Lloyds having shouldered the biggest share of the PPI misselling penalties, and lingering doubts about the true value of the bank’s assets. But those should be ironed-out over the next couple of years, and I can see doubling potential in that kind of time frame.
Yesterday’s darling
Can Tesco (LSE: TSCO) get back to its former glory? A doubling of today’s 190p price wouldn’t quite take the shares to their earlier highs, and we’ve already seen a recovery of 42% since a 137p bottom on 7 January. A doubling from that price would only need a further 84p — just 44% from today. But I can’t see it happening any time soon.
Tesco shares are on a P/E of 41.5 based on expectations for the year to February 2016, and even with two years of EPS recovery on the cards, that would still only drop to 17.5 by 2018. That’s too high in my view, especially as dividends are close to non-existent right now and are only expected to yield around 2% in two years’ time.
Combine that with the thought that Aldi and Lidl are opening new stores faster than Tesco could close them, and that retail price deflation is far from over, and I don’t see Tesco shares doubling for quite some time yet.
Comeback star?
When Rolls-Royce (LSE: RR) issued the first of a series of profit warnings in 2014, a shocked market couldn’t get rid of the shares fast enough. The result was a 60% fall to 497p from the end of 2013 to 9 February this year. But again, since then we’ve seen what could be the start of a recovery, with a 32% gain to 680p.
Demand from the aerospace and defence businesses has slowed, and the firm has set out on a cost-reduction programme to help contain the damage — and new chief executive Warren East, previously at ARM Holdings, has said that 50% of the planned £150m-£200m annual savings has already been identified. Rolls-Royce’s finances can be a bit opaque to non-experts, and that’s very much disliked by institutional investors and has helped push the shares down a bit too.
But the firm’s aero engines will surely be in great demand over the longer-term future, and if we see a return to sustained EPS growth I reckon there’s a good chance of a doubling in the next five years.
