How We Tripled Our Money in a Year

This past year was an exciting one to be an investor. At one point in March, stocks were down well more than 50% from their 2008 highs. Yet amid this chaos, we at Motley Fool Global Gains identified a promising small company with a strong and growing core business that was selling for a dirt cheap 4.5 times earnings.

Since we recommended that stock to our members in October 2008, it's returned more than 200%. During that time, it has also listed on a major exchange and vastly expanded its production and distribution capacity. Thus, even though it's not quite the deal we got back in October, the stock remains on our Best Buys list.

But before I get to the stock, I want to tell you how we found it and provide a few points that can help you identify similar things for yourself.

You find what you're looking for
You may have heard (sometime, somewhere) that the market is efficient. That means that at any moment, all of the available information on a stock has been incorporated into its price. While I believe that's generally true, I don't believe it's true all the time. What's more, it's less true in certain market segments than others.

For example, take a popular U.S. megacap like Apple (Nasdaq: AAPL  ) . It's tracked by 45 sell-side analysts, has earned a rabid following of fans and detractors, and everything from its products to the health of its CEO are reported on every day in the media. This, in other words, is a stock whose price is largely efficient. If you choose to buy or sell Apple stock, you're likely not doing so with any kind of informational advantage over your counterparty.

That, however, is less likely to be the case if you're buying and selling stocks that most other market participants aren't even paying attention to. Specifically, that's small stocks, foreign stocks, and especially small and foreign stocks.

Which brings me back to my story
The stock we discovered at Global Gains that's more than tripled in less than one year is a small Chinese fertilizer company called China Green Agriculture (AMEX: CGA  ) . In hindsight, at less than 5 times earnings last October, it looked like a clear winner. The company's organic fertilizers were coming into favor as the government encouraged farmers to increase food production without a destructive environmental impact. Further, government efforts to aid rural farmers were giving those farmers -- China Green's customers -- increased purchasing power. Finally, there was a clear catalyst in the new 40,000-metric-ton manufacturing facility that the company planned to open with the capital it raised in a private placement.

Yet the market either wasn't paying attention here, or it was far too focused on the perceived risks of investing in China Green Agriculture. Those included a very short track record as a public company, an over-the-counter stock listing, and no permanent CFO.

How, then, were we able to get comfortable with recommending China Green's stock?

Elementary, my dear Watson
The simple fact is that we traveled to Xi'an, China, last June, and spent two days visiting with the company and touring its R&D and production facilities. We talked extensively with management about their plans for the future and their perceived market opportunities. And we got answers to every question we had about the company.

This doesn't mean we walked away 100% confident. After all, a company visit, while an important part of our research process at Global Gains, will never reveal the full story. But the visit enabled us to get comfortable enough to recommend that our members buy shares at less than 5 times earnings within the context of a diversified portfolio.

And the result speaks for itself. Not only is it up more than 200%, but it's outperformed other well-known China plays, such as PetroChina (NYSE: PTR  ) , Baidu (Nasdaq: BIDU  ) , and China Mobile (NYSE: CHL  ) , as well as other well-known fertilizer plays, such as PotashCorp (NYSE: POT  ) and Mosaic (NYSE: MOS  ) .

Your takeaway
Now, you may not have the resources to travel to China to check up on all of the small, cheap, and fast-growing companies there that you may be interested in owning. But short of that, the lesson is that the only way you're going to be able to take advantage of the inefficiencies that exist in the stock market is by doing an extraordinary level of due diligence. That means going through the filings with a fine-toothed comb, checking up on a company's auditor to make sure it has a good reputation, and doing extensive analysis of the numbers to make sure they're good, but not too good to be true.

Yet if you can make company visits a part of your research process, I encourage you to do so. We travel to China each and every year with Motley Fool Global Gains and have found that it's the best way to identify both the most promising ideas as well as potential disasters.

In fact, we're headed back to China in July to meet with more than a dozen promising names in cities such as Shanghai, Xi'an, and Harbin. While we may not find another company that will triple our money in less than a year, we do believe our intelligence from the ground gives us -- and can give you -- an advantage in the market. I'd like to invite you to receive all of our free real-time reports from the field. Simply enter your email address in the field below to let us know where to send them.

Tim Hanson is co-advisor of Motley Fool Global Gains. He does not own shares of any company mentioned. China Green Agriculture is a Global Gains recommendation. Apple is a Stock Advisor pick. Baidu is a Rule Breakers selection. The Fool's disclosure policy is Zen.


Read/Post Comments (18) | Recommend This Article (92)

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 June 24, 2009, at 6:26 PM, nasis wrote:

    I see the point that highly covered stocks are likely to be more "efficiently" priced than small caps, in the sense that "mistakes" in pricing are more likely to be caught. But that's not to say, as suggested, that a given investor is more likely to have an informational advantage with small caps. I know nothing about the future prospects of China Green Agriculture, for instance, and that would largely still be the case even after reading the Global Gains newsletter. But I do have some information about Apple's prospects. At the basest level, there's good reason to believe that Apple is not the next Satyam, and part of that security comes from massive analyst coverage. I think the article is right to focus on "informational advantage" as key for investing.

  • Report this Comment On June 24, 2009, at 7:08 PM, automaticaev wrote:

    what dose it say they did. Got so bored after the first sentence. What did they do? i assume it takes 2 or at most 3 sentences to explain.

  • Report this Comment On June 24, 2009, at 9:30 PM, bigcat1969 wrote:

    They found a stock that made money. They bragged about it. They want you to sign up and they will tell you about the next stock that makes money before it makes money, maybe.

  • Report this Comment On June 24, 2009, at 10:07 PM, Aujla007 wrote:

    Lol, these past 2 weeks all i've seen in my e-mail are "Your private invitation expires at 11:59 PM tonight...‏

    ", "Extended 1 day -- A better deal on PRO‏" blah blah blah.. It's always about signing up for more services with these guys.. This was probablly the worst 120 dollar (canadian) investment i've ever spent. I come on Motley fool maybe once a month.. Can you guys atleast set up a proper message board sheesh.. messages.yahoo.com message board OWNS motley fools board. Anyone have a recommendation on a service on motley fool thats actually worth paying for? Anyone?

  • Report this Comment On June 24, 2009, at 10:15 PM, Seano67 wrote:

    Well, doesn't the Motley Fool give you an opportunity to try the service out and decide whether or not you want to keep it? If that's still the case (and I'm assuming it is), then you have no one to blame but yourself for spending $120 CAD on a service that you didn't even like.

  • Report this Comment On June 24, 2009, at 10:20 PM, HectorLemans wrote:

    I'm not convinced this company is that great - especially since it hasn't been around that long. The Fool said it was good and its stock has doubled in value since then? Smells like survivorship bias to me.

  • Report this Comment On June 25, 2009, at 2:37 AM, lotontech wrote:

    Tripled your money in one year? Is that all?

    I achieved 2000% in Only 12 Weeks ( http://lotontech-money.blogspot.com/2009/05/2000-in-only-12-... )

    Now who's bragging?

    Seriously though, it wasn't that hard between March and May this year when many downbeaten stocks became multi-baggers; like Barclays Bank in the UK which increased about 500% within three months.

    Unfortunately I don't have a stock recommendation service, and I wouldn't dream of starting one :-(

    In fact, my result had more to do with sound "money management" using Stop Orders and Position Sizing rather than clever stock picking.

  • Report this Comment On June 25, 2009, at 10:51 AM, TMFMmbop wrote:

    We try to reverse engineer our successes and failures so we can repeat them and avoid them, respectively, in the future. This article was meant to share that process with you; not brag.

    If you'd like to see photos of last year's visit to China Green, you can find them on my blog: http://caps.fool.com/Blogs/ViewPost.aspx?bpid=190077&t=0...

    Tim

  • Report this Comment On June 26, 2009, at 11:17 AM, d2mccarthy wrote:

    You know, I gotta hand it to you guys/gals.... the Fool sells a product, I paid $5000 for it and tripled that amount by educating myself and following along investigating some of their leads, all within 4 months. You want to complain about this and that, fine but some of we Fools are too busy counting the dollars we made already. Sing me up for a lifetime renewal, boys and hold onto your seats ! Finally, I wish you would put a team in China permanently ! dmac

  • Report this Comment On June 26, 2009, at 4:15 PM, TMFMmbop wrote:

    The permanent Asia team is something I think we should do as well.Glad to hear you've done well with the research and education.

  • Report this Comment On June 26, 2009, at 4:34 PM, yamazed wrote:

    Read Barron's magazine or Wall Street journal without the need of paying for services.

    I am convinced you will endup with better and more accurate reports than a paying spamming service.

  • Report this Comment On June 26, 2009, at 7:27 PM, Vesta108 wrote:

    Kudos to d2mccarty,

    I spent $1000.00 on two years of Pro membership and made ten times that much since October using modest account and following their advice. Those who complain expect something for nothing, or must be such pros themselves, that they don't need advice. I'm happy with my choice. I did cancel some of my Fool subscriptions in favor of Pro.

    Vesta

  • Report this Comment On June 27, 2009, at 12:52 AM, kennyace1965 wrote:

    I am a new subscriber to stock advisor and so far am pleased with the choices that have been made. i just got into a postion to invest in mid May and i am up 10% since then with stocks like ATVI, OMTR, PPDI and a few others. I cant wait to get my hands on PRO. unfortunatly i wont be in a postion to do that until year end or early next year.

    kenny

  • Report this Comment On June 29, 2009, at 2:18 PM, BaaMan wrote:

    I got the same profits by buying, GE, BAC and some other larger caps in March, when everyone else left them for dead. Outstanding profits can always be had by buying most any stock at a real value price. So, while I agree that small caps and undercovered stocks can be a goldmine, so can large caps in the right circumstances and the profits are likely more secure in the long term. Those who loaded up on some of the "penny" large caps in March are smiling now. I think some of these large caps still have another 100% potential within a year, and that's not too shabby...

    CB

  • Report this Comment On June 29, 2009, at 5:26 PM, RTFM2009 wrote:

    Hi,

    Congratulations d2mccarthy and Vesta108 .

    I am new, joined in Jan 09, but this is my first Post. Based on the recommendations by Stock Advisor, I have made 30% gain on ATVI, 40% on APPL

    Honestly after reading this article last week I jumped in and bought CGA at 7 (without any research) and now it’s at 8.50 (THANKS) Wish I had got in when it was round $3, would have mad a killing.

    I don’t get it why people keep complaining about. You can’t get everything for free, its that simple.

    I was planing to get the PRO membership, since I am new got bit scared to sign up. But I will be signing up to M F Global Gains, sometime later this year.

    RT

  • Report this Comment On June 30, 2009, at 12:24 PM, thisislabor wrote:

    We try to reverse engineer our successes and failures so we can repeat them and avoid them, respectively, in the future. This article was meant to share that process with you; not brag.

    If you'd like to see photos of last year's visit to China Green, you can find them on my blog: http://caps.fool.com/Blogs/ViewPost.aspx?bpid=190077&t=0...

    ....

    I read the article, read the comments, and then reread the article.

    you know after you explained the article and I reread it I think I learned something. Thankyou. You should do a short article explanation like your first sentence there for every article you write. It would give me like 40x more context for what I am reading. I am apparently very poor at figuring out what//why you are writing stuff for.

  • Report this Comment On July 01, 2009, at 10:27 AM, TMFMmbop wrote:

    @RT -- I hope you do join us at GG. In the meantime, make sure you sign up to get the free dispatches from China:

    http://www.fool.com/shop/newsletters/25/ecap.htm?cid=1668&am...

  • Report this Comment On July 01, 2009, at 11:15 AM, plange01 wrote:

    the car rental stocks are on fire this year and are now just coming into their busy season..(dtg) and(car) want to triple your money ? take a look at these!

Add your comment.

DocumentId: 928070, ~/Articles/ArticleHandler.aspx, 4/24/2014 5:40:15 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement