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? Sure, 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 32 are up tenfold or better since the day David Gardner first recommended Marvel. Some of the more notable names:
American Tower (NYSE: AMT )
priceline.com (Nasdaq: PCLN )
F5 Networks (Nasdaq: FFIV )
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 Cherokee (Nasdaq: CHKE ) , Goodyear Tire (NYSE: GT ) , Twentieth Century Fox Licensing, and Caterpillar (NYSE: CAT ) , 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.
A good screener can help you find these traits. I use the one supplied by Capital IQ to look for companies that are 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 13 companies passed my test. As above, you'll recognize some of the names. Apple makes the list, as does Deckers Outdoor (Nasdaq: DECK ) .
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 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 company 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.
This article was originally published Sept. 1, 2009. It has been updated.
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Fool contributor Tim Beyers had stock and options positions in Apple and a stock position in Disney at the time of publication. Apple, Disney, and priceline.com are Motley Fool Stock Advisor selections. Disney is also an Inside Value pick. American Tower is a Rule Breakers recommendation. The Motley Fool has a disclosure policy.