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 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? It is today since its stock has been crushed, but just six months ago Sirius was 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, 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 (7) | Recommend This Article (95)

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 January 19, 2009, at 10:04 AM, spanishhorns wrote:

    Motkey Fool has been pumping xm / sirius for month and month and now while its down your going to kick it in the head with an revised article,why not pull the rug out from underneath a slipping company! I guess i better sell my share because nothing good will come of this news! The meadia must understand that the public masses are like sheep,they (the media) can strat a standpeed and lead them off a cliff.

  • Report this Comment On January 19, 2009, at 10:38 AM, Concepts2001 wrote:

    Either It's True or It Isn't

    You Choose

  • Report this Comment On January 20, 2009, at 3:12 AM, redneckdemon wrote:

    And you are still posting here because you think this site is useless? Uh-huh.

    Misleading headlines are annoying, I'll grant you, but so are people who have nothing constuctive to say. Now days any article even mentioning Sirius XM is a pump and dump article? Come on. This article is pointing out some of the hallmarks of successful companies in the hopes you might know what to look for if you want to get a piece of the next one.

    It also contains a sales pitch, at the very bottom, in just 3 or 4 sentances.

    You want to know the name of the company? Get off your duff and start looking. If you want someone to just tell you how to spend your money, get a broker and pay him to do it. Your dentist will probably do it for free, as will any number of penny stock scammers.

  • Report this Comment On January 21, 2009, at 8:33 PM, greenwave3 wrote:

    All you morons who are bashing the author should understand that the point of the article is not to tell you what stock to buy (if he did tell you what to buy, you'd be a lemming just for listening). The point is that you should be fundamentally evaluating companies you are considering investing in.

    As for everyone pumping SIRI, you have to understand that the equity shares are worthless. If and when the time comes to visit the bankruptcy judge, it will be bondholders and not equity-holders who get a dime.

  • Report this Comment On January 23, 2009, at 12:49 PM, old228 wrote:

    As a subscriber to Hidden Gems for 2 years I think I have a pretty good handle on it!!

    Over that 2 years I bought about 10 or 20 stocks recomended by Hidden Gems

    Of all those stocks all but 3 are worth less now than when I bought them!

    They give you plenty of choices and recomendations with each issue of the newsletter but It seems that I could have done just as well with throwing darts to make my selections.

    Too soon old and too late smart ,i guess

    old 228

  • Report this Comment On January 23, 2009, at 12:57 PM, Slipswitch wrote:

    Why not just do a colorful banner advertisement.

    I'll pass on HG - I already lost enough there.

  • Report this Comment On January 23, 2009, at 3:18 PM, JPDemers wrote:

    "Over that 2 years I bought about 10 or 20 stocks recomended by Hidden Gems

    Of all those stocks all but 3 are worth less now than when I bought them!"

    And that's different from all other portfolios on the planet ... how? 3 out of 20 being up is probably better than average.

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