The One Stock You Must Buy

Stop me if you've heard this one. The one stock you must buy is ... the next Microsoft (Nasdaq: MSFT  ) , the next Wal-Mart (NYSE: WMT  ) , the next Adobe (Nasdaq: ADBE  ) , and the next Dell (Nasdaq: DELL  ) all rolled into one.

I'm sure you've heard some semblance of that pitch at cocktail parties, golf outings, weddings, and of course, on the Internet.

It's a pretty appealing pitch. After all, Microsoft, Wal-Mart, Adobe, and Dell are some of the stock market's greatest success stories. These companies have earned early investors simply mind-boggling 15,000% to 100,000% returns over their lifetimes.

The secrets of success
So the question is: Does that one stock you must buy exist? Of course it does. But can you find it? That's a different matter.

Here, however, is a litmus test to gauge every stock tip you come across. Simply ask: Does this company bear any resemblance at all to Microsoft, Wal-Mart, Adobe, and Dell before they were big names?

That's not to say that one stock will be a discount retailer or a tech superstar. Rather, Microsoft, Wal-Mart, Adobe, and Dell all share a set of remarkable traits that characterized them when their remarkable stock market runs began. All were:

  1. Small.
  2. Led by a dedicated founder.
  3. Fiscally conservative.
  4. Profiting from a wide market opportunity.

If the next stock that's pitched to you doesn't possess these traits, then you're probably better off passing.

A case study
Consider, for example, the case of Sirius XM Radio (Nasdaq: SIRI  ) -- the stock that is most often pitched to me at cocktail parties, golf outings, weddings, and of course, on the Internet.

It it small? No. Sirius is capitalized at $4.5 billion.

Is it led by a dedicated founder? No. Though Mel Karmazin has entertainment industry experience, he only came aboard in 2004.

Is it fiscally conservative? No. The company is not profitable, carries a heavy debt burden, and continues to dilute shareholders.

Does it have a wide market opportunity? Folks may disagree with me here, but I think the markets for music and news are already fractious and saturated.

The Foolish final word
I'm not here to be negative about Sirius. The company could right its ship and reward investors. However, I don't think that it possesses the core traits that made companies like Microsoft, Wal-Mart, Adobe, and Dell such incredible investments -- the qualities we seek in the Motley Fool Hidden Gems small-cap investing service.

Again, we believe that tomorrow's big winners will start off:

  1. Small.
  2. Led by a dedicated founder.
  3. Fiscally conservative.
  4. Profiting from a wide market opportunity.

If you'd like to take a look at the companies we've found that meet the four criteria mentioned above, companies that have put our service 23 percentage points ahead of the S&P 500 since 2003, click here to join Hidden Gems free for 30 days.

This article was first published on Oct. 19, 2006. It has been updated.

Tim Hanson does not own shares of any company mentioned. Microsoft, Dell, and Wal-Mart are Inside Value recommendations. The Fool's disclosure policy assures you that no stocks were harmed in the penning of this article.


Read/Post Comments (8) | Recommend This Article (5)

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 August 19, 2008, at 3:30 PM, sickofsiribasher wrote:

    Tim, I think for you to make a sweeping character judgement against Mel Karmazin as just someone with some experience but not a dedicated founder is a lot of crap and yet another post by Fool writers that just uses the SIRI ticker as an excuse for people to click on yet another load of BS trying to sell advice that is useless. For the record, although he may not have started the SIRI company he IS the founder of SIRI-XM and it would not be there today if not for years of his preserverence with corrupt government officials at the FCC amd other positions in Congress that in the pocket of the NAB and Clear Channel lobbists. SIRI will prevail and you will truly be the fool. Your site name is appropriate and I just hope no-one takes anything said here as real advice.

  • Report this Comment On August 19, 2008, at 4:17 PM, smilinbill wrote:

    Your title to this article is probably right. it's one you should have. Take a chance. Get SIRI while it's cheap!

  • Report this Comment On August 19, 2008, at 5:05 PM, HippWord wrote:

    It amazing how people now. We have to read garbage comments like this one because people don't think for themselves.

    Motley Fool has been wrong about satellite radio from the very start. They know the words they print today will have an affect on the stock tomorrow, and they choose to pick on Sirius and Mel.

    Over 18 million Subscribers, great leadership. I think its safe to say that Sirius XM will continue to grow and even change - they are already teaming up with iphone.

    18 million subscribers, come on people, this company is a classic. Hold on this ride is going to be fun.

  • Report this Comment On August 19, 2008, at 5:33 PM, McNabRanch wrote:

    You are spot on.....I agree allready.....it'll go or it won't....use your analytical ability to just short it and shut up about what you are doing and make yourself some money......go write about a financial...be a bit more of a challenge for ya, eh?

  • Report this Comment On August 20, 2008, at 9:59 AM, scubatoy03 wrote:

    Another typical article looking to grab your attention with a headline and then try to coax you into purchasing a membership to "read more". A complete waste of time, the article contains nothing.

  • Report this Comment On August 20, 2008, at 12:45 PM, wisdomous wrote:

    i swear i read this exact same article a few months ago. Do you guys just repost the same thing every few months? That's just going to take away from your credibility.

  • Report this Comment On August 20, 2008, at 12:57 PM, TMFMmbop wrote:

    Folks, I truly appreciate the comments. Just wanted to take note of this point from HippWord (love the name): "Motley Fool has been wrong about satellite radio from the very start."

    Aside from one commentator on our roster, we've been pretty consistently bearish on satrad since 2005 (when I started writing), which is why you folks loathe us. Here's a sampling of links supporting that assertion:

    http://www.fool.com/investing/high-growth/2007/05/02/why-sat...

    http://www.fool.com/investing/value/2008/01/14/worst-stock-f...

    http://www.fool.com/investing/general/2006/12/21/the-worst-s...

    http://www.fool.com/investing/value/2006/03/06/how-to-make-a...

    Here's a link to SIRI's chart since 2005:

    http://tiny.cc/3cJlq

    Look at it. We have not been wrong.

    Tim

  • Report this Comment On August 29, 2008, at 2:47 AM, sb101cu wrote:

    Tim, I have found your articles, mostly in the grey area, and you dont even own the stocks you recommend. How did you get here bugs me...

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