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 mid-sized 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 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, and 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. No one cared about those companies, it seemed. Sounds rather familiar, eh?

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

The next AMG?
There are many 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's 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 recently and screened for companies within those industries that had net margins and return 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

Harley-Davidson (Nasdaq: HOG  )

Recreational products

$22.57

$30.00

Keryx Biopharmaceuticals (Nasdaq: KERX  )

Biotech/drugs

$2.46

$3.45

Oncothyreon (Nasdaq: ONTY  )

Biotech/drugs

$4.93

$7.77

GigaMedia (Nasdaq: GIGM  )

Software/programming

$2.91

$7.70

Qualcomm (Nasdaq: QCOM  )

Comm. equipment

$38.04

$49.80

Activision Blizzard (Nasdaq: ATVI  )

Software/programming

$10.21

$13.14

SciClone Pharmaceuticals (Nasdaq: SCLN  )

Biotech/drugs

$2.68

$5.33

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

Foolish bottom line
After it tripled in value, Tom felt AMG no longer carried a bargain price tag, and he issued a "sell" recommendation in March 2006. But he continues to search for that winning trifecta every month in Stock Advisor. The service is now almost eight years old, and Tom and his brother David's recommendations are beating the S&P 500 by an average of 48 percentage points per pick.

If you'd like to check out all of the formal Stock Advisor recommendations (plus the top five stocks for new money now), we're offering a special 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 owns no companies mentioned in this article. Wal-Mart is a Motley Fool Inside Value pick. Activision Blizzard is a Stock Advisor recommendation. Motley Fool Options has recommended a synthetic long position on Activision Blizzard. The Fool owns shares of Activision Blizzard. The Motley Fool is investors helping investors.


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  • Report this Comment On February 09, 2010, at 7:49 PM, Everydayisgood wrote:

    Rex, it seems to me that cash needs to be evaluated in a broader context of overall company performance.

    As you say, your illustrations need to be researched further and Harley Davidson is truly an example of a company that requires additional scrutiny because past performance does not equate with current circumstance.

    You correctly use the past tense "had" when referring to your illustrations, and the past tense definitely applies to Harley whose current cash is largely a function of the heavy debt load that they have acquired in order to finance their contraction and restructuring.

    Harley is definitely not creating a lot of cash by selling hogs or cups or clothing. Their much larger loss than expected loss last quarter and their weak guidance for 2010 (which looks very optimistic to me) makes their stock price look very rich today. It is not "beaten down" as you suggest, but "coming down" in response to its plunging fundamentals.

    A fair value for Harley Davidson as I see it would be about twice book, which would place the stock price around 15. This might be generous, however, given their significant consolidation, heavy debt load, and an aging customer base.

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