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 eventually issued a sell recommendation, though -- 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 midsized money management firms from around the country. These businesses invest money in stocks for other people, including 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 some 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, 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. Who cared about these companies, anyway?

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

The next AMG? 
There are 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 ready to break out when the industry recovers.

To illustrate, I selected a few sectors that have hit the skids recently, and I 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

PDL BioPharma (Nasdaq: PDLI  )

Biotechnology

$5.46

$7.30

China-Biotics (NYSE: CHBT  )

Personal products

$13.21

$19.74

Gilead Sciences (Nasdaq: GILD  )

Biotechnology

$38.47

$49.50

Amedisys (Nasdaq: AMED  )

Health-care services

$36.62

$64.28

Medifast (NYSE: MED  )

Personal products

$25.59

$38.23

Cal-Maine Foods (Nasdaq: CALM  )

Packaged foods

$28.35

$38.88

Almost Family (Nasdaq: AFAM  )

Health-care services

$36.60

$44.12

Source: Capital IQ, a division of Standard & Poor's, and Yahoo! Finance.

All of these companies are presented for further research; this is not a buy list.

Foolish bottom line
After tripling in value, however, Tom felt Affiliated Managers Group no longer carried a bargain price tag. Though he still believed in the management and the business model, he issued a sell recommendation because of AMG's valuation. But he continues to search for that winning trifecta every month.

Obscure, efficient companies in beaten-down industries are among those sought out by our Motley Fool Special Ops team, and there are many more under-the-radar stocks out there that offer even better opportunities. If special situations and deep value opportunities intrigue you, then take your investing to the next level in 2011 with Special Ops. Membership is strictly limited, so enter your email address in the box below to receive your invitation!

This article was originally published April 21, 2006. It has been updated.

Fool analyst Rex Moore views the world through glass-colored glasses. He owns no companies mentioned here. Gilead Sciences is a Motley Fool Stock Advisor pick. Wal-Mart Stores is both a Motley Fool Inside Value and Global Gains selection. The Fool owns shares of Almost Family, Wal-Mart, and Cal-Maine Foods. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (4)

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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 15, 2011, at 10:43 PM, OklaBoston wrote:

    I'll go along with the "obscure" part of this article's recommendations, but I'm not so sure about the "out-of-favor industry" part. Wouldn't a RELATIVELY obscure company in an industry that is in favor be even better? Or in an industry that is no longer as far out-of-favor as it was 6-12 months ago?

  • Report this Comment On February 16, 2011, at 11:01 AM, TMFOrangeblood wrote:

    OklaBoston,

    I'd say sure, any of those would work. The idea, of course, is to catch things when they're unloved and unknown... before any serious recovery (i.e., moving toward loved and well-known) begins.

  • Report this Comment On March 16, 2011, at 9:16 AM, IlanBigfoot wrote:

    Hi OklaBoston,

    I have no facts to back up this assertion, but it seems to me that an obscure company in an "in-favor" industry would most likely be getting kicked around by its competitors. As an example, Computer Hardware is a pretty well-known industry right now with big names like Apple, HP, IBM, and Dell. But an obscure name (for me anyway), like say, Ricoh Co. Ltd., or a has-been like Xerox (heard of, but haven't seen in years) would have to have a really secure niche and their chance of growth seems small. And if the industry as a whole takes a dive, they might be swept out to sea.

    But if the whole industry is out-of-favor, when the industry comes back into favor, the best companies within it will roar back even more.

    That's the theory, anyway. As to the timing, I'd have to ask how you'd measure degrees of "out-of-favor".

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