500 Stocks Have Already Doubled — Here’s the Next One

Key Concepts

Momentum Investing: A strategy that involves buying stocks that have already experienced significant price increases, with the expectation that this upward trend will continue.
Uniform Accounting: A proprietary accounting methodology used by Altimetry Research that aims to provide a more accurate picture of a company's true financial performance by adjusting for GAAP (Generally Accepted Accounting Principles) distortions.
GAAP Accounting: Standard accounting practices that can sometimes obscure a company's actual profitability due to various adjustments and treatments (e.g., stock options, R&D, pension recognition).
"Buy High, Sell Higher": A trading philosophy that aligns with momentum investing, suggesting that stocks that are already rising are more likely to continue their ascent.
"Tenbagger": A stock that increases in value by tenfold.
AI Enablers/AI Enabled: Companies that directly provide the infrastructure or technology for Artificial Intelligence (AI), or companies that leverage AI to enhance their existing business models.
Bottlenecks in AI Infrastructure: Key constraints hindering the widespread adoption and scaling of AI, particularly electricity generation and distribution.

Market Growth and Momentum Investing

The market has experienced significant growth, with over 500 US stocks doubling in value this year. This trend indicates a "growth and momentum market" where the strategy of "buy high and sell higher" is more effective than searching for undervalued "cheap" stocks. The common perception that only the "Mag 7" stocks are driving this growth is challenged, as a much broader range of companies have seen substantial price increases.

The Power of Momentum and Fundamental Strength

Research, including a piece by Cliff Asnice at AQR Capital, suggests that stocks that have already experienced significant price appreciation (e.g., doubled) have a greater than 50% chance of doubling again. This probability increases significantly when combined with strong fundamental momentum.

Key Findings on Doubled Stocks:

Hit Rate: If a stock doubles, there's a slightly better than 50% chance it will double again.
With Uniform Earnings Momentum: When a stock doubles and its uniform earnings are also increasing, the hit rate rises to 60%.
Average Return: The average return for stocks that double and exhibit uniform earnings momentum is approximately 164%.

This strategy emphasizes identifying stocks that have already demonstrated price momentum and then verifying their underlying fundamental strength through uniform accounting.

The Limitations of GAAP Accounting

A core argument presented is that GAAP accounting distorts a company's true earnings, making them appear lower than they actually are. This is due to various accounting treatments that have evolved over decades, including:

Stock Options: Expensing stock options reduces reported earnings without a cash impact, and re-rating them as the stock price increases further lowers earnings.
Research and Development (R&D): Investments in R&D are expensed, impacting current earnings.
Pension Recognition: Accounting for pensions can affect reported earnings.
Merger and Acquisition Accounting: Complex accounting rules for M&A can also influence earnings figures.

Collectively, these adjustments can make reported earnings appear around 40% lower than they would be under accounting practices from 40 years ago. This discrepancy can lead investors to overlook fundamentally strong companies that appear less profitable under GAAP.

Identifying the Next Doubling Stock: Primorus (PRIM)

Joel Litman highlights Primorus (PRIM) as a stock exhibiting the characteristics of a potential future doubler.

Primorus (PRIM) - Case Study:

Industry Focus: Primorus is a construction engineering company specializing in energy and utility infrastructure, particularly in building out electricity generation.
AI Bottleneck: The rapid growth of AI is creating a massive demand for electricity, which is identified as a significant bottleneck. Traditional energy sources like solar and wind are insufficient for the scale required, and nuclear energy has long lead times. Natural gas is seen as a key solution for near-term electricity generation.
Market Demand: The demand for electricity generation infrastructure is high due to AI needs. This is further exacerbated by backlogs in gas turbine orders (double global capacity) and shortages in transformers.
Stock Performance: Primorus's stock has already doubled or more.
Fundamental Strength: The company demonstrates strong and accelerating uniform earnings growth, aligning with the criteria for a potential repeat doubler.
Risk-Reward: Litman suggests Primorus offers a better risk-reward profile compared to highly scrutinized stocks like Nvidia, by focusing on the underlying infrastructure needs of AI.

Broader Sector Trends and AI Enablement

Beyond specific companies, the discussion touches upon broader sectors experiencing growth:

AI Enablers and AI Enabled Companies: This includes companies directly involved in AI technology and those that strategically integrate AI into their operations.
Infrastructure: The re-industrialization of the US and the focus on energy needs are driving growth in infrastructure-related businesses.
Energy Sector: The US's position as a leading oil producer and the need for affordable energy prices necessitate continued construction in energy-related businesses.

Example of an AI Enabled Company: Build-A-Bear

The example of Build-A-Bear illustrates the concept of an "AI enabled" company. While not a traditional tech giant, Build-A-Bear has successfully leveraged AI in its CRM, product development, and online presence, leading to significant stock appreciation (50-80%). This highlights that AI enablement can be found in unexpected sectors.

Re-evaluating Market Valuations with Uniform Accounting

The conversation addresses concerns about high market valuations, particularly the Shiller Price-to-Earnings (PE) ratio. Litman argues that when GAAP accounting distortions are corrected through uniform accounting, the market's PE ratio is not as extreme as commonly perceived.

GAAP vs. Uniform Earnings: Reported GAAP earnings are approximately 40% lower than actual earnings when adjusted for accounting distortions.
Shiller PE Misinterpretation: The widely cited Shiller PE, which doesn't account for these adjustments, suggests the market is at historically high levels.
Adjusted PE: With uniform accounting, the market's PE ratio is closer to 23-24 times.
Growth Justifies Valuation: A PE of 24 is considered reasonable if real earnings are growing at 7-10% annually, which Litman asserts is currently happening.

Conclusion and Actionable Insights

The market is characterized by strong momentum, with a significant number of stocks doubling. The key to identifying future growth lies in combining price momentum with fundamental strength, as measured by uniform accounting. Investors should look beyond traditional GAAP reporting to understand a company's true financial health. The energy and infrastructure sectors, driven by the demands of AI, present compelling opportunities. Companies that are either enabling AI or are effectively leveraging AI within their business models are prime candidates for further growth. By adjusting for accounting distortions, the market's valuation appears more reasonable, suggesting continued potential for growth rather than an imminent crash.

Call to Action: Viewers are encouraged to explore Altimetry Research's work, including a free stock pick in the energy sector, by scanning a QR code or clicking a link in the video description. They are also invited to share their own investment strategies and stock ideas in the comments.