The Next Montana State

The opening of the college football season brought with it plenty of unexpected outcomes. Here in Denver, no result was more stunning than the 19-10 defeat of the hometown Buffalos of the University of Colorado at the hands of the Montana State Bobcats.

Wait. Stunning is the wrong word. Upsets aren't freaks of nature; they're brought about by a combination of events that, while perhaps improbable, aren't that surprising on the whole. For example, only those who had never seen the George Mason Colonials play were stunned by their upset of the Connecticut Huskies in this year's NCAA basketball tournament.

An upset in the making
It's not as easy to say that about Montana State, but it's not altogether inaccurate, either. Take head coach Mike Kramer, for example. He had a long list of accomplishments well before beating Colorado. Among them: four straight winning seasons and three Big Sky conference titles. Plus, at 7-4 and a season-long top-25 ranking in Division I-AA, 2005 marked Kramer's best season of the past four.

Conversely, Colorado ended 2005 with four straight losses, including an embarrassing 70-3 drubbing by eventual national champion Texas. Opening the season against a squad that conventional (ahem) wisdom said would be overmatched left the whiff of an upset hanging in the air.

Upsets in the stock market
Thankfully for investors, the stock market has its own version of upsets. Some of them are based on valuation, as Bill Mann and Tom Gardner argued for after George Mason's improbable run. Others are like Montana State, where favorable market conditions and misunderstood business prospects raise the specter of a multibagger. It's those kind of situations that David Gardner and the rest of us on the Motley Fool Rule Breakers team seek in picking winners.

But how to find them? Good question. I constructed a three-part screen based on the conditions that led to the Bobcats' successful uprising:

  • An engaged coaching staff, as represented by insiders who own at least 5% of the outstanding shares.
  • Improving fundamentals, as represented by at least 30% annualized sales growth over the prior three years.
  • The surprise factor, as represented by 60% or less institutional ownership.

Capital IQ found 36 firms with these characteristics and were valued at $250 million or more at the end of 2002. Their average return since then is a market-beating 81%. Eleven have even doubled in price. Here are seven of my favorites:

Company

Price Change

America Movil (NYSE: AMX  )

664%

Credit Acceptance (Nasdaq: CACC  )

354%

Infosys Technologies (Nasdaq: INFY  )

219%

Ameristar Casinos (Nasdaq: ASCA  )

191%

SkechersUSA (NYSE: SKX  )

174%

Wimm-Bill-DannFoods (NYSE: WBD  )

151%

MGM Mirage (NYSE: MGM  )

113%

Source: Capital IQ

What can we learn from this list? Well, first, that popularity means little. Being obscure might even make the other team -- which, if you're a stock investor, equals the big-money mutual funds -- overlook your squad till it's too late.

Second, not all winners come from obvious places. Remember: Montana State plays in the relatively unknown Big Sky conference. But the 'Cats still managed to throttle the Big 12's Buffs. Similarly, Mexican wireless carrier America Movil has pounded the S&P 500 over the past three years by catering to one of the world's hottest emerging markets.

Find the next Montana State
As fun as it can be to rewind and study history, we really want to know what the next Montana State will be. That's our mission at Rule Breakers -- we use the market's growth stock fire sale to buy excellent businesses that will upset the market in spectacular fashion.

In fact, we've already found four in the first two years of the service. You can read up on those stocks, as well as our new picks, by trying Rule Breakers free for 30 days. There's no obligation to subscribe, and you can enter the huddle right now by clicking here.

Fool contributor Tim Beyers only breaks the rules in his portfolio. Wimp. Tim didn't own shares of any of the companies mentioned in this story at the time of publication. Get the skinny on all of Tim's stock holdings by checking his Fool profile. Ameristar is a Hidden Gems pick. The Motley Fool has a disclosure policy.


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