Doubling your money. The internet is home to many stories from people who have double or tripled their money in the markets. Grandiose stories of getting into a stock before a meteoric rise. The truth is, most of these stories are fake news. Investing with an aim to doubling your money in a short period of time is akin to gambling. There are no shortcuts to building wealth. Most investors who have successfully achieved 100% returns (or more) over a short period of time have lucked out.
The good news is, doubling your money is possible. Investors simply need a more realistic time frame. How quickly can you double your money? Enter the rule of 72. According to the rule, to find how long it will take you to double your money you take the rate of return and divide it by 72. Likewise, if you want to make a double over a certain period, the rule of 72 can be applied to know what rate of returned will be required to achieve this goal.
As an example, if you want to double your money in three years, your investments will need to average 26% returns annually. This is no easy feat. As a rule of thumb, you can estimate your returns by basing it off the company’s expected earnings-growth rate. If you invest in a stock that that is expected to grow earnings by 15% annually, then you can reasonably assume its stock price will achieve similar returns. In this scenario, an investor would double their money in five years.
Let’s take a look at one of the hottest tech stocks in the country — CGI Group (TSX:GIB.A)(NYSE:GIB). CGI Group shareholders have been a happy bunch of the past few years. Over the past five years, the company’s stock price has more than doubled (163.76%). In fact, it has doubled a few times over the past 10 years and was trading at a mere $11.30 per share 10 years ago. For long-term investors, that would equal a total return of 713%.
CGI Group is one of the best-managed tech companies in Canada. It has consistently achieved its targets and as such, when the company says it expects to double in size over a five-year period, investors should listen. In 2015, the company released a strategic, long-term target to double in size within five years. As we’ve seen, the company’s share price has more than eclipsed this mark.
How has CGI been able to achieve such impressive returns? Given the sheer size of the company (a market cap of $24.5 billion), it cannot rely on organic growth alone. The key growth driver for the company is acquisitions. There are two types of acquisitions — smaller, bolt-on acquisitions and those that the company considers to be transformational in nature. The last acquisition of this sort came back in 2012 when it acquired Logica for $2.8 billion. The deal was 30% accretive to the company’s earnings at the time.
Since then, it has focused on reducing its debt load, which is down 56% since ballooning post Logica. The company’s debt-to-equity is now in line with historical averages and it is well positioned to make another big deal.
Without taking any further acquisitions into consideration, the expectation is for 10% average annual growth. At this rate, it would take investors approximately seven years to double their money. Consider this the worst-case scenario. As discussed, it has a reliable management team and is primed for another large acquisition.
CGI Group has doubled on average every few years, and with 2020 just around the corner, expect them to announce another long-term doubling target. Can you double your money with CGI Group? It is absolutely possible.
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Fool contributor Mat Litalien owns shares of CGI GROUP INC CL A SV. CGI Group is a recommendation of Stock Advisor Canada.