Recently, Disney announced it would buy Marvel Entertainment for $4 billion in cash and stock, creating 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. Of the more than 2,400 stocks traded on U.S. exchanges that were worth at least $150 million in market cap on June 7, 2002, only 21 are up tenfold or better since the day of David's first recommendation. Some of the more notable names:
Southern Copper (NYSE: PCU )
Chemical & Mining Co. of Chile (NYSE: SQM )
Akamai Technologies (Nasdaq: AKAM )
Source: Capital IQ, a division of Standard & Poor's.
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 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. I couldn't understand why the company that was making millions licensing its images to the likes of General Mills (NYSE: GIS ) and Crocs (Nasdaq: CROX ) would want to get into the production business.
But then I dug deeper, poring through the text of its self-financing agreement and management's projections. I found a far less risky deal than I had expected, and 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 no-lose proposition.
By May of 2007, I was in. Within six months, shares had fallen 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 of January of 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, I recently 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% annually over the past three years.
- Produced no less than $100 million in cash from operations over the past year.
Only 10 companies passed the test. As above, you'll recognize some of the names. Hansen Natural, a proven millionaire-maker stock, makes the list, as does Infosys (Nasdaq: INFY ) and Diamond Offshore (NYSE: DO ) .
But the stock I like best of all is a current Stock Advisor pick that David first singled out in October of 2004, and which has been rerecommended multiple times since. David calls it one of his core stocks, and it's already one of his best-ever picks for Stock Advisor. Which stock is it? Click here to get full access to all of David's reports and the service's full scorecard of recommendations. A risk-free 30-day guest pass is yours for the asking.
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This article was originally published on Sept. 1, 2009. It has been updated.
Fool contributor Tim Beyers owned shares of Akamai and Marvel at the time of publication. Disney and Marvel are Stock Advisor selections. Akamai and Hansen Natural are Rule Breakers recommendations. The Fool has a disclosure policy.