A Triple in the Making

America is talking about Affiliated Managers Group!

OK, not really. In fact, there's a good chance you've never even heard of this company, yet its value more than tripled after Tom Gardner recommended it in Motley Fool Stock Advisor in September 2002. (He later issued a sell recommendation -- more on that later.) What made this stock a success? Three main reasons, a couple of which are surprising.

1. Obscure company
Obscure, and rather boring, AMG is a holding company of midsized money management firms from around the country. These businesses, which invest money in stocks for other people, include Essex Investment Management, Friess Associates, and Tweedy, Browne.

Most great success stories were unknown in the beginning. Even Wal-Mart garnered no excitement in its early days. But these under-the-radar companies can offer individual investors some bargain prices.

2. Efficiently run
AMG has done a great job of assembling high-quality asset-management firms and leaving them largely autonomous. Yet all the affiliates benefit from lower administrative costs, access to better technology, new-product development, and diversified approaches across the company. In addition, incentives are tied to the performance of cash earnings per share. Haphazard or indifferent management doesn't cut it at AMG, and the result is a lean, efficient, well-operated machine.

3. Bad industry
When Tom uncovered this solid business, it had been beaten down nearly 40% from its 52-week high. Of course, we were smack-dab in the middle of one of the worst bear markets in years, and the entire asset-management industry was hurting. Who cared about these companies, anyway?

But because of top-notch efficient management, AMG was not only able to weather whatever the market threw at it, but it was also poised to reap big benefits when the market eventually turned around. It was a quality company available at a bargain price.

The next AMG?
There are other factors to consider when sizing up a potential investment. But if you can identify a company that's (1) obscure, (2) efficient, and (3) in an out-of-favor industry -- well, that's a beautiful thing. You may have found a stock that may be beaten down well below its fair value and is ready to break out when the industry recovers. To illustrate, I selected a few industries that have hit the skids over past year (well, even more than most), and I screened for companies within those industries that had net margins and returns on assets significantly better than industry averages. Here's a short list of such companies that now trade well below their 52-week highs:

Company

Industry

Recent Price

52-Week High

Rentech (AMEX: RTK  )

Oil and gas

$2.05

$2.93

Huntsman (NYSE: HUN  )

Chemical manufacturing

$7.86

$14.50

PotashCorp (NYSE: POT  )

Agricultural chemicals

$92.93

$184.88

AT&T (NYSE: T  )

Communications services

$26.46

$33.15

USEC (NYSE: USU  )

Industrial metals

$4.58

$7.24

ATP Oil & Gas (Nasdaq: ATPG  )

Oil and gas

$11.10

$26.55

U.S. Steel (NYSE: X  )

Iron & Steel

$43.43

$134.88

Some of these aren't exactly obscure, but I wanted to include some bigger names you might like to investigate. All these companies are presented for further research; this is not a "buy" list.

Foolish bottom line
After tripling in value, however, Affiliated Managers Group no longer carried a bargain price tag. Though he still believed in the management and its business model, Tom issued a "sell" recommendation because of AMG's valuation. But he continues to search for that winning trifecta every month for his Stock Advisor members.

The Stock Advisor service is now more than seven years old. Tom and his brother David's recommendations are beating the S&P 500 by an average of 41 percentage points. If you'd like to check out all of the formal Stock Advisor recommendations as well as Tom and David's top five stocks to buy now, we're offering a 30-day free trial. Click here to give it a whirl.

This article was originally published April 21, 2006. It has been updated.

Rex Moore salutes another of his former schools, Anderson High School in Austin, Texas. Go, Trojans! He does not own shares of any company mentioned. Wal-Mart is an Inside Value recommendation. The Motley Fool is investors helping investors.


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