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 a year 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 (8) | Recommend This Article (27)

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 26, 2009, at 4:23 PM, madmilker wrote:

    Tim...you need to quit going to weddings, cocktail parties, golf outings, and the dang Internet....

    and turn off your dang RADIO....please let the dead dog lie.

  • Report this Comment On June 26, 2009, at 4:40 PM, trammen0 wrote:

    You always have to put something NEG. about SIRIUS that what makes me think you guys will soon be shown for what is truley going on between you and Hedge funds,.,,,

  • Report this Comment On June 26, 2009, at 4:50 PM, xGreedx wrote:

    Way to copy and paste and change the date. This is the 3rd time this has been posted under a different date. The Fool is lame and all investors ignore it. People still haven't figured out that this company is a investor inside joke. "The fool" I mean - seriously - I know Americans are foolish puppies and all, but not me.

  • Report this Comment On June 26, 2009, at 5:19 PM, bw1962 wrote:

    The fact that BMTI is not on the Motleyfool is absurd!

    The best P.R. of late and it is no place on the Fool?

  • Report this Comment On June 26, 2009, at 6:18 PM, jay10002 wrote:

    I OWN Siri shares and follow the news. Why is it that it seems that every 2 of 3 articles I read about Siri come from the Fool? What is its agenda? These aren't articles, these are blogs, which I don't need to read.

  • Report this Comment On June 26, 2009, at 8:13 PM, madmilker wrote:

    hey...Tim...with the American consumer gettin' so tight with a George Washington tat their breath smells like sh!!.....and now they not trusting banks...i herd they puttin' all those dollars in snuff cans...so! if i wus you..i would invest in the tobacco company's like Altria because when times are good...people smoke and drink but when time are bad............they drink and smoke MO.

  • Report this Comment On June 26, 2009, at 9:36 PM, JPATRI wrote:

    SIRIUS IS A BIG BUY, and today at the close as it was in 0.46, which technically speaking leads towards 0.59-0.69 area..., short sellers pushed down the stock in the last 4 minutes.

    Five minutes after the close touched 0.47...

    So, please take a look at this article, and buy some stocks at the open on Monday..

    http://seekingalpha.com/article/145299-sirius-bears-have-lit...

  • Report this Comment On June 30, 2009, at 2:29 PM, bwindish wrote:

    Sirius XM is the best priced service in entertainment. Eventually the stock price will reflect this.

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