The Untold Story Behind Our CEO's Single Greatest Investment

Dear Fools, I'd like to make two important corrections to this article after reading the comments below. The first is that, as a matter of policy back in the Hidden Gems days, I never bought my investment recommendations. This has changed in the Everlasting Portfolio in Motley Fool One. The systems now exist for me to purchase all of my investment recommendations. And, of course, all of my purchases come after The Motley Fool buys which, of course, come after all of our members are given a chance to buy first. So I am an actual Middleby shareholder today. The second correction is that, after I stepped down from Hidden Gems in 2007 to become CEO, the new advisors of the service took issue with leadership and decided to sell the stock. I never supported that decision; however, I did fully support their right to make that decision. And, they have made a number of excellent decisions inside of Gems, leading to remarkable market-outperforming results. Today, I continue to believe in Middleby as an excellent long-term investment. It is a live holding in Motley Fool One. I wanted to be sure to make those points clearly. I hope you enjoy and find the video and/or transcript useful. - Tom Gardner

In the early 2000s, Motley Fool co-founder and CEO Tom Gardner recommended one under-the-radar stock in the Fool's Hidden Gems service that would go on to become his greatest investment of all time. The stock was called Middleby (NASDAQ: MIDD  ) , a little commercial kitchen equipment manufacturer, and when Tom spotted it, the company immediately stood out to him as the type of company he considers an outsider.

Based on the book The Outsiders, by Will Thorndike, an outsider company is the type of company that delivers unbelievable results in highly unorthodox ways. Tom bought in at $9 a share; today, it stands at $280 a share, bringing in an unbelievable 30 times Tom's investment during the decade that he's held the stock.

Now, Tom wants to share the concept of finding outsider companies early, by outlining how to pick stocks that have the potential to grow 15%-20% or more per year during the course of 10, 15, even 20 years. In this video, he tells investors how he found Middleby, why it stood out as a shining star, and the handful of key ingredients he looks for to tell an outsider stock apart from the crowd. He then tells investors how they can find out more about outsider investing through Motley Fool One, and even invites investors to join him in Dallas, along with prominent CEOs and other interested investors, to attend the Saturday and Monday games of this year's Final Four.

A full transcript follows the video.

For full access to coverage of Tom's "Outsider Final Four," click here now!

TOM GARDNER: Hi. I'm Tom Gardner, co-founder and CEO of The Motley Fool and advisor of Motley Fool One.

At Motley Fool One -- our all-access service at The Motley Fool -- we've been talking this month about outsider companies... companies that have delivered unbelievable results for shareholders, and they've done so in a highly unorthodox way, usually off the beaten path. They're not the companies, necessarily, that you've heard of in your everyday experience as a consumer.

No, these are businesses like Teledyne (NYSE: TDY  ) , which was run by Henry Singleton for decades and delivered more than 20% a year to investors over a 20-plus year period. That type of return turns your few thousand dollars, added here and there along the way, into a multimillion dollar portfolio... just one great stock like that. And that's what we've been looking for in our outsider companies based on a wonderful book, The Outsiders, by Will Thorndike.

Now, my greatest investment ever was an outsider investment, and it was an investment in a company called Middleby Corporation -- which I found. In the early 2000s, the stock was trading about $9 a share, and what I loved about the business were a few things.

Number one -- their CEO, Selim Bassoul -- who is pretty much the greatest CEO that I've encountered as an investor and student of business over the last 25 years. Selim Bassoul, number one, is all in on ovens. In fact, when he took over Middleby, the business ... When he took over as CEO, the business was distributed in a whole bunch of different products for commercial kitchens -- refrigerators, deli cases, all sorts of different... pots and pans.... everything. And ovens.

And Selim made a very interesting and highly unorthodox decision. He made the decision to simply stop selling 80% of the products that were being sold. He dropped all those SKUs, and he moved with a focus on just ovens, and he did so because ovens are a... energy efficiency is a big concern. Cost is a big concern. Safety is a big concern. And he felt, "If we can just dominate this niche... instead of trying to be all things to all people in restaurant chains around the world, let's dominate this one category."

That stock was at $9 a share. Today, it's at around $280 a share since I recommended it in 2003, 2004. It's a 30-bagger.

And what I learned from that is, if you can learn as much as possible about the CEO of your company... ensure that they are absolutely obsessed with their industry... and that they are excellent in capital allocation... in other words, Selim Bassoul has used debt -- low-interest debt -- very effectively to make acquisitions. He paid a big, special one-time dividend about seven or eight years ago. He's incredibly thoughtful about how to use capital effectively to drive long-term results for shareowners of the business at Middleby.

Middleby has gone from $9 a share. When it was about a 10-bagger, I put it out there that we would open a bottle of champagne with Selim Bassoul when the stock hit $150, and we did that together in Greenwood, Mississippi at the headquarters of Viking. If you know the Viking residential oven company, they were acquired by Middleby, and we met to discuss that acquisition and share those insights with our members.

When we were there, the stock was around $150, and I said: "Here we are, Selim. When the stock hits $300, we're going to get together again and open another bottle of champagne and celebrate." And it did that about a month ago. The stock's come back a little bit to around $280 a share, but it's still a 30-bagger since our initial recommendation in Hidden Gems about 10 years ago.

And so, what we are doing? We're gathering with Selim, with other members of Motley Fool One, with new members of Motley Fool One, with some other CEOs, and some other great investors in Dallas at the Final Four. We're going to attend the Saturday and Monday games together, which will be a very exciting time and opportunity to talk investments, to talk business, to talk to principals of the outsiders, and to find some great companies. And that's what we're doing every day in Motley Fool One.

So, if you have an interest in learning more about Motley Fool One ... In finding great outsider investments that have the potential to grow 15-20% or more per year, over not just a year or three years, but 10-25 years... these companies are not common. It takes some work to find them, but there are principles that you can use to find them, and that's what we're doing together in Motley Fool One.

So, if you're interested in Motley Fool One, outsider investing, and possibly attending the Final Four with us, click the link below and join us in the Motley Fool One member lobby. It's a completely free experience. I look forward to working together with you in the lobby and, perhaps, hopefully working together in Motley Fool One in the year and years to come.

I wish you the best of luck with your investments, and Fool on!

The "Outsider Final Four"
To get access to full coverage of Tom's "Outsider Final Four" -- including in-depth research write-ups, candid interviews with special guests, and spirited advisor roundtables -- absolutely free of charge, simply click here.


Read/Post Comments (26) | Recommend This Article (36)

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 March 14, 2014, at 1:42 PM, CoreAndExplore wrote:

    For me, learning when to sell is MUCH harder than learning when or what to buy. I've been pretty successful at the latter, but pretty dreadful at the former. I would love to see another article about that issue.

  • Report this Comment On March 14, 2014, at 1:47 PM, TMFTomGardner wrote:

    CoreAndExplore, in Fool One and the Everlasting Portfolio, I have four sell rules:

    1) A competitive threat -- usually a platform shift -- has emerged putting at risk a great company's pricing power;

    2) Succession -- the CEO that I invested in will be retiring or stepping back to Chairman, and I sell if I don't feel confident that succession will lead to another dedicated leader;

    3) Too big to succeed -- the company is now simply too large in its industry or in the overall market; there isn't enough profit and valuation upside, and it may be forced to fight defensively against upstart disruptors;

    4) Too big in my portfolio -- the stock has grown to larger than 20-25% of my portfolio and I have other worthy ideas that will allow to balance my portfolio.

    Warren Buffett has said that the best time to sell is never. Shelby Davis turned $50,000 into $900 million by pretty much never selling (when he died, he had more than 1200 stocks in his portfolio -- and were his returns merely index-like because of that? No, he earned 24% per year because he knew what to look for in great long-term winners).

    My advice is to look for the greatest companies ever. Try to sell rarely. And when you do, think of selling in increments rather than in big chunks.

    Foolish best!

  • Report this Comment On March 14, 2014, at 4:20 PM, oldengineer wrote:

    I am surprised to see TMF citing Middleby as Tom's greatest investment. Isn't this the same company that TMF advised the HG members to sell? TMF was upset that Selim wanted a $200,000 bonus.

    I don't remember that TMF ever advised HG members to buy after advising us to sell.

    OE.

  • Report this Comment On March 14, 2014, at 5:40 PM, Cigardenia wrote:

    And I remember when and why you recommended to sell.

  • Report this Comment On March 14, 2014, at 6:55 PM, lwbaum wrote:

    Thanks for suggesting this great company. Unfortunately, like the people commenting above, I followed the suggestion to sell years ago and thus missed much of the appreciation.

  • Report this Comment On March 14, 2014, at 10:24 PM, jcereck wrote:

    Hg never bought the stock until 10/23/03 and sold it on 1/28/2010 for a 382% gain... no where near the 3000% he is claiming. I think I now need to cancel my membership. hg sucks now anyway!!!

  • Report this Comment On March 15, 2014, at 12:49 AM, mooseback wrote:

    If you are investing to make money to use in your lifetime then Mr. Shelby didn't make 900 million he lost 50,000. If he didn't need the money why invest at all? So that heirs can gain assets they didn't work for and so not appreciate what went into earning it? As well as the large tax windfall for the government !

  • Report this Comment On March 15, 2014, at 8:12 AM, linmarman wrote:

    Ouch, mooseback. We buy a lot of things we never hope we have to use. But we may need them, and we'll be glad we had them if we do. From bandaids and spare tires to insurance. I look forward to the day I hit retirement age, not so I will immediately retire, but so that I CAN IF I WANT TO. btw, if you read the book about the Davis family, you'll know that the elder Davis' son and his grandsons were given something he would think are more valuable than the inheiritance - a great work ethic and good money sense

  • Report this Comment On March 15, 2014, at 8:16 AM, invbrow wrote:

    What's a "bagger"? Obviously I'm new to MF!

  • Report this Comment On March 15, 2014, at 8:22 AM, OLPo wrote:

    Very, very interesting what some people here are saying about that selling advice they received...

    If it's true, and I don't have any reason to doubt it, I still hope to see some sort of explanation from TMFTomG or another TMF principal.

    It's not a disaster to make a mistake, especially amongst many other lucrative recommendations, but rather a proof of trust to admit it.

    However, the story remains valid and good to remember.

  • Report this Comment On March 15, 2014, at 8:39 AM, JayWemm wrote:

    Tom does explain that he held onto MIDD,in his personal portfolio,I guess,after the HG advisors advised to sell it in 2010.I took that advice and sold,obviously a mistake. It does seem like a poor example to use to promote the MF services.

  • Report this Comment On March 15, 2014, at 10:57 AM, dackerman21 wrote:

    Stop blaming the Motley Fool for putting out a sell recommendation. People buy and sell all the time. I think as an investor you must think for yourself. At any given time you can find both bullish and bearish thesis on every company. You have to analyze and make the best decision possible for yourself.

    I remember when the sell rec came out on Hidden Gems. I was a shareholder of MIDD and I remember giving some good thought about what I should do. The main reason they decided to sell was that they thought the CEO compensation was too large. I remember thinking to myself,"If this guy (Selim) is truly that rare bird, that truly special CEO, then extra few million dollars should NOT be enough of a reason to sell". I also remember that I reminded myself to NOT make a rash decision and to give it a few days to think about it. I read many of the people's opinions on the boards, and especially, TMF1000, who disagreed with the sell rec.

    After giving it thorough thought I made the decision for myself to NOT sell. Obviously that turned out too be a good decision.

    The moral of the story is that nobody has the exact right answer. But, don't go blaming anyone for the decisions you make. Some of the decisions are going to be right, and some of the decisions (like for me FMD, which I thought about and decided to buy from Hidden Gems rec, and got creamed) are going to be wrong.

    But, if you are smart, and think thoroughly, and are patient, then, if you pick 10 well thought out stocks and hold them for a very long time, I would think 6-7 of them will be big winners and a few will be losers.

    Dave

    Sold 20% of my MIDD holding in January and plan on keeping the remaining 80% for the foreseeable future

  • Report this Comment On March 15, 2014, at 7:18 PM, MLinvestor62 wrote:

    'Agree wholeheartedly dackerman21.

    I joined HG in 2004 and accumulated my MIDD position during 2005 through July 2006 after my own exhaustive due diligence. My weighted avg cost is $26.92. I have never sold a share of MIDD or any other stock I have purchased since beginning to invest in individual securities back in 2004. I have some turds no doubt. But I have learned so so much from the TMF over these years.

    You need to make your own decisions.

    Good luck!

    Dan

  • Report this Comment On March 16, 2014, at 9:21 AM, dackerman21 wrote:

    in other words, Selim Bassoul has used debt -- low-interest debt -- very effectively to make acquisitions.

    That is my favorite line from above. Selim & his team are obviously great innovators and great manager of people, but they are also extremely adept at how money works. Over the past 5 years money has never been so cheap. MIDD recognized this and used this to their advantage. They were in a position to capitalize from this cheap money, and they have certainly taken advantage of it

    It's no different than how Buffet used the insurance business and his understanding of how to invest the float, to be a jumping board to one of the greatest companies ever.

  • Report this Comment On March 17, 2014, at 11:28 AM, Tcostant wrote:

    A good idea when you have a stock go up this much, is sell half and lock in a total gain. And then ride the resty for total upside.

  • Report this Comment On March 19, 2014, at 12:34 AM, jcereck wrote:

    may be you should talk about some of your higher value investments... form and scss with the green hair and all... you never were in for this gain... like you claim to have been... it is just a paper gain for the fool. but the fool was in for the scss loss and the form loss.

  • Report this Comment On March 19, 2014, at 12:36 AM, jcereck wrote:

    we could drink champagne with them too!!! what a party!!!!

  • Report this Comment On March 19, 2014, at 12:41 AM, jcereck wrote:

    By the way... for you that don't know, hidden gems is not real money anymore.. as it didn't make any money!!!!! join the new services to loose your money too

    !!!!!!!!!!!!!!!!!!!!!!!!!!!

  • Report this Comment On March 19, 2014, at 12:48 AM, jcereck wrote:

    I am also a holder of midd, as I didn't seen when the ceo wanted 200k more!!!! as the fool did.

    they deal in M, not k.... at that level!!!!! 200k is nothing, not even a car to them.

  • Report this Comment On March 19, 2014, at 1:29 AM, jcereck wrote:

    but the video says,, a 30 bagger for hidden gem members..... we'il I'm missing 100 x... as I got a 3 bagger by your recommendations. no where near 100x!!!! even!!!!!!!!!!!!!!

  • Report this Comment On March 19, 2014, at 1:29 AM, jcereck wrote:

    lets just lie to get new members.,,, well, you lost me a long term member,

  • Report this Comment On March 19, 2014, at 3:20 PM, KingArthur13 wrote:

    I purchased MIDD at $53.74 on May 9, 2008, and we all know what happened later that year. Following Warren Buffet never sell mentality, I held and still have it today. It is at about 425% increase over purchase price, or about an average of 70% per year. At the same time, I also bought ISRG, but could no longer handle the volatility and sold late last year...taking a very reasonable profit, but now I wish I hadn't sold.

    Long live the Kingdom of Fools.

  • Report this Comment On March 20, 2014, at 12:26 AM, jcereck wrote:

    I could also claim the same but bigger growth with monster.. I found it much lower and still own it today!!!! I'm great, invest with me!!!!!! I started a company with my brother,.... we are great, just follow us.. see I found monster!!!! I now something !!!!! I could claim many company's ... that I own.

  • Report this Comment On March 20, 2014, at 12:32 AM, jcereck wrote:

    the fool had a story on the company I work for, and I called them out on it... but no one contacted me on it. they were way off, totally missing the point... but I couldn't correct them. or show them the big bang light at the end of the tunnel. it was black and white to me, without giving out company secrets.

  • Report this Comment On March 31, 2014, at 8:46 PM, pl091000 wrote:

    yes, HG is advise a sell, lucky for me, i ignored it. my buy price is 25.04. it has returned huge for me. i never renewed by HG membership, but have kept on with stock advisor. however, i don't buy much that Tom recommends, as his brother is kicking his behind. Having said that, it seems like the brothers are misleading by claiming 3000% returns. not quite being totally truthful here. BUT, is the stock advisor service to point you in the right direction towards some stocks that may take off. not all will, but for $200 per year, it's a good starting point, and way less than any ripoff broker would charge you to churn your account.

  • Report this Comment On May 14, 2014, at 10:04 AM, tjmc53 wrote:

    Thanks for your in depth explanation of MIDD. I am new to MF One & MIDD is my biggest loser. I will be patient, seeing that this is a well run company. My only concern is the large amount of debt that they have.

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