We investors are a funny lot. With a universe of more than 9,000 stocks to choose from, we spend hours and hours scouring them trying to find the one that will be the next big breakout hit. The one that will double, triple, quadruple in value over time. Maybe even increase by more than 10 times! The fabled Peter Lynch 10-bagger (cue in trumpets and angels singing "Halleluiah!").
So we winnow and narrow our selections. We comb through reams of financial statements. We wear out the batteries on three calculators figuring out return on equity, net profit margin, and the worst calculation ever devised -- the one that will curve your spine, make your eyes bleed, and cause premature baldness: return on invested capital. Then we perform our discounted cash flow analysis. Finally, when we've got our winner (or so we hope), we plunk down our hard-earned cash hoping it's the next home run stock. As I said, investors are a strange bunch. We continue to reinvent the wheel every time. Think of it as wasted effort.
The secret to market-beating returns
Psst! Wanna know the secret to finding the next home run stock? C'mere. Come closer. Ready?
You already own it.
Yep. That's right, it's already in your portfolio. You have already chosen some of your best ideas to invest in. You've already winnowed and narrowed. Your hairline already resembles Tom Gardner's, the co-founder of The Motley Fool. So why go through all that hassle again?
Warren Buffett was fond of saying investors had a lifetime investment punch card with only 20 punches on it so we better make the best use of them. Chances are, your portfolio's punch card already has one or two or three companies on it that represent some of your best thinking. Why go through all the trouble again of trying to find something new when you already know the story so well with what you own?
Indeed, since we're on the prowl for finding a Lynchian 10-bagger, we might do well to heed the advice he gave in his best-seller Beating the Street:
"The best stock to buy may be the one you already own."
If you're still doubtful that a stock that's already up 30%, 40%, or 100% can't represent a good investment for you, think again.
Tom Gardner has created a unique service in Hidden Gems, his small-cap stock newsletter. Every month, he and a guest analyst unveil two companies with the greatest growth potential for the next three to five years and track them real-time with lively give-and-take on dedicated discussion boards. Over the service's 20 months, Tom's recommendations are beating the market by an eye-popping 32 percentage points! Yet to achieve those amazing results, he has revisited some of his best ideas.
The magic of re-upping
In October 2003, Tom recommended FARO Technologies (Nasdaq: FARO ) , a small but leading developer of measurement tools and software for manufacturers like Boeing (NYSE: BA ) and Lockheed Martin (NYSE: LMT ) . Over the next three months, the manufacturer of the FARO Arm and FARO Gage doubled in price, an incredible increase and one that many pundits thought couldn't be sustained.
Well, defying logic and conventional wisdom, Tom recommended FARO Technologies again in January 2004, while it was trading near some of its all-time highs. The result? FARO has gone up another 19% since then, well ahead of the S&P 500's 11% return. The original recommendation is up 137% to the market's 21%. Had you invested $1,000 in FARO when Tom first recommended it, and then added another $1,000 on the re-recommendation, your portfolio would now be worth $3,560, or an average 78% more!
Maybe you're thinking that was a fluke. Well, in April of last year guest analyst Charly Travers recommended Transkaryotic Therapies (Nasdaq: TKTX ) , a small-cap developer of drugs for rare genetic diseases that competes against the likes of much larger biotechs such as Amgen (Nasdaq: AMGN ) and Genzyme (Nasdaq: GENZ ) , companies with market caps in the billions of dollars. Over the next four months, Transkaryotic jumped nearly 30%, giving investors a nice return on their money. Then Tom Gardner confounded everyone again by re-recommending it in August. The result this time? Another dramatic increase, with the August recommendation up 66%, leaving behind in the dust the market's 11% rise.
Want a more contemporary example? Consider the remarkable story of Wal-Mart (NYSE: WMT ) . On Feb. 26, 1985, the discount retailer was selling at a split-adjusted price of $0.83, already a multibagger in its own right (by the way, Wal-Mart never actually traded for $0.83, but that's what stock splits will do for you). Ten years later, it closed at $10.79, a 1,200% increase. And as of last Friday's close, it was trading at $51.49, yet another 377% increase and 6,100% overall!
While not every investment will be the next Wal-Mart -- really, few companies can do that well -- the moral of the story is you needn't continuously go out and find new investment ideas to achieve market-beating returns. Some of your old ideas can still represent your best growth possibilities. There's no need to reinvent the wheel.
If you'd like to check out the companies that Tom Gardner thinks are the multibaggers of tomorrow, Hidden Gems offers a 30-day free trial. Then these small caps can soon become some of your favorite ideas that you can invest in again and again.