The Best Stock Idea I've Ever Seen Is No More

By now you've likely heard the news, Disney (NYSE: DIS  ) is buying Marvel Entertainment (NYSE: MVL  ) for $4 billion in cash and stock, creating what will be the first 14-bagger in the history of our Motley Fool Stock Advisor service.

That's an extraordinary return, made more extraordinary by its rarity. Only 14 of the more than 13,000 stocks traded on U.S. exchanges are up tenfold or better since David Gardner first selected Marvel on June 7, 2002. Some of the more notable names:

Company

Return

Research In Motion (Nasdaq: RIMM  )

3,176%

Apple (Nasdaq: AAPL  )

1,472%

Guess? (NYSE: GES  )

1,016%

Sources: Capital IQ and Yahoo! Finance.

How to spot a 14-bagger
When David first picked Marvel, it was because he foresaw a "portfolio of media properties" being leveraged in ways that would produce massive cash flows. Yet the company was still underpriced and underappreciated in the weeks following the release of Spider-Man:

With a low-priced stock and total market capitalization of only about $170 million, Marvel Enterprises -- Spider-Man's daddy -- is today priced at the equivalent of a few weeks of the blockbuster film's box office receipts. (A box office of which Marvel, incidentally, gets an unspecified cut -- 5%, it is said -- and the same amount for eventual DVD sales, as well.)

I'm among the many who didn't listen to that sage advice. Instead, I picked on Marvel for using debt to buy back shares, and remained skeptical of the company's deal to self-finance films starring minor characters.

But then I dug deeper, pouring through the text of its self-financing agreement and management's projections. What I found was a far less risky deal than I had expected. David's thesis began to make sense. Cash would flow through the financing facility as films were made, paying off production borrowings. Meanwhile, cash from licensing agreements would fund the rest of the business and pay off debt for share repurchases.

In short: Marvel was beginning to look like a steal.

By May 2007, I was in. Within six months, shares had risen, then fallen back below my $27.25 purchase price. So I ran some more numbers and found that investors were pricing Marvel Studios as if it were worth less than zero.

By the close January 2008 -- five-and-a-half years after David's first recommendation -- I made Marvel 20% of my portfolio. You know what happened next.

What the next great multibagger will look like
I'm happy to be sitting on such a large gain. But I'm also eager to move on. Like you, I want to find the next Marvel Entertainment, and I want to start right now. Ready?

When I bought Marvel, it possessed three traits that made it the best stock idea I had ever seen:

  • A consistent ability to produce high levels of cash flow.
  • High returns on capital.
  • Proven revenue growth.

Once the deal goes through, Marvel the stock will be no more. So this morning, I ran a screen at Capital IQ to find other stocks that share these same qualities. Specifically, they had to be worth at least $250 million in market cap, trade on a major U.S. exchange, and:

  • Have generated a better-than-20% return on capital over the trailing 12 months.
  • Grown revenue by at least 20% a year over the past three years.
  • Produced no less than $100 million in cash from operations over the past year.

Only 20 companies passed the test. As above, you'll recognize some of the names. Hansen Natural (Nasdaq: HANS  ) , a proven millionaire-maker stock, makes the list, as does Research In Motion and First Solar (Nasdaq: FSLR  ) .

But the stock I like best of all is a current Stock Advisor pick that David first singled out in October 2004, and which has been re-recommended multiple times since. David calls it one of his core stocks, and it's already one of his best-performing picks for Stock Advisor. Click here to read about this stock and to get full access to all of David's reports and the service's full scorecard of recommendations, free for the next 30 days. There's no obligation to subscribe.

Already a subscriber to Stock Advisor? Log in here.

Fool contributor Tim Beyers had stock and options positions in Apple and Marvel at the time of publication. Apple, Disney, and Marvel are Stock Advisor selections. Disney is also an Inside Value pick. Hansen Natural and First Solar are Rule Breakers picks. The Fool has a disclosure policy.


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  • Report this Comment On September 01, 2009, at 5:55 PM, plange01 wrote:

    you could have done better than a 14 bagger in 6 months with car or dtg. 2 barely in business car rental companys.marvel is nothing better a comic book seller!

  • Report this Comment On September 01, 2009, at 6:56 PM, majordm wrote:

    10 year calls don't count. Get a tiger in your tank or something.

  • Report this Comment On September 01, 2009, at 7:31 PM, xnautis wrote:

    What happens to your investment in MVL? What will one share of MVL be equal to after the buy-out?

  • Report this Comment On September 01, 2009, at 11:11 PM, HarryCarysGhost wrote:

    Please tell me if I'm wrong ,as I understand each shareholder receives $30 in cash and roughly .75 in disney stock. To a grand total of $50 per share.

    I was trying to figure out If it would be worth it to me to buy MVL at todays price of $47.

    Got turned off by the fact Dis pays their Div annually so I gave up on that plan.

    If I may digress, I remember reading one of the MF articles about Marvel (Back at $4). It sounded good to me but I was young and low on funds.

    Just a couple of Mths ago I had some money to spend and MVL was in my top five. Picked a high yeild instead.

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