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

When Disney bought Marvel Entertainment for $4 billion in cash and stock, it created the first 14-bagger in the history of our Motley Fool Stock Advisor service. Can you ever hope to achieve similar returns? Yes, I think it's possible, if you're willing to commit time and patience.

But first, some history ...
Multibaggers are rare to begin with; 14-baggers are rarer still. 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 25 are up tenfold or better since the day David Gardner first recommended Marvel. Some of the more notable names:

Company

Return

Range Resources (NYSE: RRC  )

1,241.6%

Cliffs Natural Resources (NYSE: CLF  )

1,223.5%

Ultra Petroleum (NYSE: UPL  )

1,080.7%

Sources: Capital IQ and Yahoo! Finance.

David chose Marvel because he foresaw a "portfolio of media properties" being leveraged in ways that would produce massive cash flow. His was a minority view 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.

And this was big business. In 2008, Marvel earned more from licensing than Viacom's (NYSE: VIA  ) Nickelodeon group, Hewlett-Packard (NYSE: HPQ  ) , and World Wrestling Entertainment (NYSE: WWE  ) , reports License Global magazine.

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 have collected 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.

Today, Marvel is officially a Disney subsidiary. 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 12 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 Freeport McMoRan Copper & Gold (NYSE: FCX  ) .

But the stock I like best of all is a current Stock Advisor pick that David first singled out in October of 2004 and 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.

Already a subscriber to Stock Advisor? Log in here.

Fool contributor Tim Beyers owned shares of Disney at the time of publication. Disney is a Motley Fool Stock Advisor selection and an Inside Valuepick. Hansen Natural is a Rule Breakers recommendation. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 08, 2010, at 3:38 PM, johnidaho wrote:

    I get the feeling Motley Fool is no more.

  • Report this Comment On February 08, 2010, at 7:22 PM, JEPAFF wrote:

    David also promoted Stanley Furniture. We shouldn't forget that....

    - JP

  • Report this Comment On February 08, 2010, at 7:49 PM, JEPAFF wrote:

    David should temper his "win" comments with notes about some others. Let's start with STLY, for example, also in Hidden Gems.

    - JP

  • Report this Comment On February 08, 2010, at 10:58 PM, TMFMileHigh wrote:

    Hi JEPAFF,

    >>David should temper his "win" comments with notes about some others. Let's start with STLY, for example, also in Hidden Gems.

    Oh absolutely. We've all made some lousy picks, yours truly included. I was wrong about Secure Computing and TASER, and sold Apple waaaaaaaay too early when I owned it the first time. Learning from our investing mistakes is a very Foolish principle.

    And yet I don't want to forget that David's swing-for-the-fences style tends to produce enough huge winners to not only eat the losses of the losers but also generate market-crushing returns.

    To each his own style -- David's works very well for him.

    Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On February 09, 2010, at 12:02 PM, JEPAFF wrote:

    Difference, Tim, is that broker's and folks with large resources -- say, ownership in a large bulletin board system -- can fail and swing. Real folk, with moderate incomes, have a helluva time with that scenario. We need to hit singles and doubles. You can argue that's a risk question -- yes, ok, I agree, but the constant stream of advertising which only says "Look at Marvel !" gets frustrating simply because it advertises the Mark McGwire on Steroids and ignores the frequently more useful Tony Gwynn. or even Felix Milan.

    (PS. Didn't mean to post the same line twice. First one took so long to post, I reposted. And then they both popped up. How do I delete my own posts?)

    Cheers,

    John

  • Report this Comment On February 10, 2010, at 9:03 AM, TMFMileHigh wrote:

    Hi John,

    >>(PS. Didn't mean to post the same line twice. First one took so long to post, I reposted. And then they both popped up. How do I delete my own posts?)

    Yeah, I've seen the system screw up like that, too. You can click the hand to the right of the box where your additional comment appears to write a note to the techies, letting them know it should be deleted.

    >>Real folk, with moderate incomes, have a helluva time with that scenario.

    I'm not so sure about that. I consider myself "real folk," working overtime to make sure my family's fed and my kids stay in school, and yet this is largely the strategy I use.

    The two keys are to (a) keep transactions costs low, and (b) invest across a broad spectrum of stocks, placing bigger bets only when you've done enough due diligence to understand the risk you're taking.

    Thanks very much for writing. I hope 2010 is a home run year for your portfolio.

    Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On February 17, 2010, at 3:30 PM, Ironbob wrote:

    SHOW OF HANDS PLEASE. Is anyone else sick and tired of reading about David Gardener's DIS and MRVL pick?!?! I mean good grief, it's not like he picked out some unknown companies and had the abilitiy to see into the future.

    I mean hell, I bought into HST last year and almost tripled my money in under a year when they sold out but I'm not arrogant enough to believe that my stock picking ability had anything to do with it. I chose it because of its dividend, statements and P/E.

    So Marvel earned more licensing revenue than WWE! MY LORD, STOP THE PRESSES! A company that's been around for 75 years has better license revenue than one that's been around 25.

    Here's something for ya Dave, I made a good amount of money off Marvel back in the 90s! It's not that hard.

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