Old Dogs Can Learn New Tricks

The hottest stock on the market doesn't always ride on the latest technology. Old dogs really can learn new tricks -- and reward their shareholders in spades.

Don't believe me? Have a look at these wrinkly old fogies -- and their breathtaking recent performances:



CAGR, 1999-2009

CAPS Rating

Middleby (Nasdaq: MIDD  )




Companhia de Bebidas Das Americas




Teva Pharmaceutical Industries (Nasdaq: TEVA  )




Genesee & Wyoming (NYSE: GWR  )




Source: Capital IQ, a division of Standard & Poor's.

These companies come from all walks of life:

  • Middleby makes ovens for the restaurant industry. And that's pretty much all it does, with myopic fanaticism. 86% of Middleby's sales in 2007 helped foodies like Denny's (Nasdaq: DENN  ) fry, boil, grill, or otherwise warm up some food.
  • AMBEV is a Brazilian giant of beer and soft drinks with a headlock on selling drinks in the very large and rapidly strengthening South American market.
  • Teva is an Israeli maker of pharmaceutical drugs. With a strong generics business, Teva steps in and profits when patents expire on the blockbuster drugs of Merck (NYSE: MRK  ) and other pharma giants.
  • Short-line railroads are Genesee & Wyoming's paths to profit. The company connects big rail networks to the places they can't quite reach.

Do you see the common thread here, besides hundred-year corporate histories? Here's a hint: it's a trait common to nearly every Motley Fool Hidden Gems recommendation, young or old.

More clues!
Still need more help? OK. I'm talking about one of these five criteria that the Hidden Gems team seeks in every small-cap stock:

  • Lots of assets, little debt.
  • Plenty of free cash flow.
  • Insiders own lots of company stock.
  • Top-notch management.
  • A dominant hold on a profitable niche.

Most of these companies fail the debt-to-assets test but sport lots of free-flowing cash. Genesee misses the cash flow boat. AMBEV's management holds almost none of their own shares. And let's just say that the question of classy management is subjective.

But each of these companies found their own unique niche in the business world, and they've done their darnedest to hold on to their market-leader advantages.

Old dogs, new tricks
And that takes some guts, shaking things up in those dusty old offices. For example, Middleby used to sell all sorts of food service equipment, from freezers to fryers and everything in between. But in 1998, the company abandoned half of its annual sales to focus solely on heating equipment. That refocusing effort has paid off handsomely. And Foolish co-founder Tom Gardner recommended the stock to Hidden Gems readers way back in 2003 for a 145% return today in spite of the hard-crashing economy.

And here's the exciting part: in November, the newsletter rerecommended another centenarian with a unique market focus. It's a regional utility that uses those dependable cash flows to invest in high-growth opportunities. If that business model sounds familiar, you're thinking of an old textile mill by the name Berkshire Hathaway (NYSE: BRK-B  ) that grew into a ubiquitous conglomerate under the masterful hand of Warren Buffett.

Grab a free 30-day trial pass and go see what I mean. Starting from less than a $700 million market cap, this buried treasure doesn't have to grow anywhere near Berkshire's size to delight investors. And we all know that there are no sure things in investing, but this is as close as you'll ever get. This old hand is trying out some new tricks as we speak.

Further Foolishness:

Middleby and Genesee & Wyoming are Motley Fool Hidden Gems selections. Berkshire Hathaway is a Motley Fool Inside Value pick and a Motley Fool Stock Advisor recommendation, and The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund holds no position in any of the companies discussed here, but has followed that November pick for years. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.

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