Here’s a weird question that might force you to “think outside the box” for a minute …
If cities were stocks, which ones would you be buying right now? New York? Shanghai? Rio?
Before you answer, I’d like to introduce you to an ultra-successful investor who I’m convinced would actually ignore these cosmopolitan capitals and instead load up on left-for-dead places like my new hometown.
There’s a chance you’ve never heard of Tom Jacobs, but here’s all you really need to know about the guy: He’s an old-school value hound who loves a good turnaround story.
Oh, and there’s one more thing I should mention … over the past seven years, while running real-money portfolios at Complete Growth Investor, Tom managed to beat the S&P 500 by a tally of 188% to 46% -- outperforming the index by more than 10% per year.
Why he’d buy The Big Easy
New Orleans definitely isn’t what you’d call a blue-chip city. It’s home to just one Fortune 500 company, Louis Armstrong International Airport looks like it hasn’t had a facelift since 1973, and I think it’s safe to say we won’t be hosting the Olympics anytime soon.
Not to mention, if you wander too far from the French Quarter or the tree-lined streets of the Garden District, you’ll discover that four and a half years after Hurricane Katrina, much of the city is still in shambles.
But as ESPN writer Wright Thompson recently put it, “these are strange and beautiful days in New Orleans” – and he couldn't be more right.
The slow move from surviving to thriving
Among other things, the Crescent City is now home to at least half a dozen Hollywood film crews, a new mayor, and the Super Bowl champion Saints.
So, you see, while we’ll probably never have the economy, population, or sophistication of a Hong Kong or a San Francisco, what we do have is an unparalleled opportunity to rebound -- not to mention, completely surprise anyone who doubts us.
And, as Tom Jacobs knows, that’s often the key to making a killing in the stock market.
Case in point
Back in 2003, when most analysts and money managers were piling on the biotech bandwagon, Tom Jacobs was taking a hard look at a little-known company in an industry that had been left for dead – literally.
In his research write-up for death-care provider Alderwoods Group, Tom explained that the death-care industry had fallen on hard times due to a steadily shrinking death rate during the late 1990s.
As a result, death-care companies began taking on massive amounts of debt in a failed attempt to fuel growth through acquisitions, and before long the top players were being forced to suspend dividends, slow acquisitions – and even declare bankruptcy.
The worst of the worst
Alderwoods Group emerged as the reorganized, renamed product of a death-care bankruptcy, and when Tom found it, it was still sitting on nearly $700 million in debt -- but like I said, the guy loves a good turnaround story. And this one began with a major shakeup in management.
Shortly after declaring bankruptcy, the board decided to clean house and bring in John Lacey – a man with more than 25 years of experience in turning around failing companies – to run the business.
Free cash flow and return on invested capital skyrocketed shortly after Lacey took over, but what really caught Tom Jacobs’ eye was the fact that Alderwoods’ enterprise value (essentially a company’s market cap, less cash, plus debt – or what a buyer might actually expect to pay for the business) stood at just 4.6 times free cash flow.
Compare that with the current 38.6 multiple of a beaten-down blue-chip like GE (NYSE: GE ) and you’ll begin to see why he was so intrigued.
“Worth 75% more even assuming no growth”
According to Tom’s model, even if growth were to stagnate, Alderwoods was worth at least 8 times free cash flow – and as it turned out, he was right on the money.
In late 2006, Alderwoods was acquired by its chief competitor at a hefty premium – and those in the Fool community who followed Tom’s advice were able to lock in 125% gains.
Granted, well-known companies like Apple (Nasdaq: AAPL ) and Research In Motion (Nasdaq: RIMM ) – which are the stock market equivalent of a New York or a Shanghai – have returned far more than 125% since 2003, but the fact of the matter is that given their size, growth is going to be harder and harder to come by.
Not to mention, with dozens of Wall Street analysts following their every move, it’s highly unlikely the market is drastically misjudging their value today.
That’s why Tom Jacobs continues to instead focus on little-known, misunderstood, and left-for-dead companies like ATP Oil & Gas (Nasdaq: ATPG ) , Cameco (NYSE: CCJ ) , Sears Holdings (Nasdaq: SHLD ) , and Steak n Shake (NYSE: SNS ) -- each of which has at least doubled in value since he purchased shares.
It’s also why we’re excited to announce that Tom Jacobs has come back to the Fool to run our new Motley Fool Special Opportunities real-money portfolio – and why I urge to you take a look at the “Special Ops” bundle that Tom just put together.
It reveals everything from Tom’s nine secrets for building a winning portfolio to step-by-step instructions on how he finds these special opportunities that can double your money.
For a limited time, this special report can be yours absolutely free. Simply enter your e-mail address in the box below, and Tom will be happy to rush you a copy.