Turbocharge Your Portfolio

I have need for speed.

I am amazed by speed skaters, Tour de France cyclists, and open-wheeled race cars. So how can I put this fondness for speed to use in my investment strategy? By investing in Speed Demons.

While La Vida Loca companies have good margins and good capital velocity, Speed Demons have thin margins but amazing capital velocity. Like La Vida Loca companies, Speed Demons can make great investments that turbocharge your portfolio.

Companies that go fast
Below are some Speed Demons that you might want to know about:

Nucor, the disruptive mini-mill steel company, and Income Investor pick Sysco, the food-service distributor, invest lots of capital in plants, property, and equipment. Nucor keeps building and improving its mini-mills, and Sysco continuously invests in distribution infrastructure. And since they only take small pieces of profits, they have to generate sales as efficiently as possible while keeping a close eye on their working capital, especially inventory.

Express Scripts, the pharmacy benefits management company, and Rentrak, the media sales and rental information company, require significantly fewer physical assets. Because they provide services, both companies have to be careful not to charge customers too much. Otherwise, customers will look for alternatives. Unfortunately, that keeps margins low, so it's a good thing they're fast with the sales.

Betting on a Speed Demon can be a tough way to make a buck. First of all, there's usually lots of competition. For example, Express Scripts has to deal with Caremark Rx (NYSE:CMX), MedcoHealth Solutions, and pharmacies every day. This competition keeps margins low.

Secondly, industry structure usually prevents a Speed Demon from raising prices enough to increase its margins. If a Speed Demon tried to increase its margins dramatically, it would most likely see its market share disappear as competitors undercut it to lure customers away.

However, if a Speed Demon can improve its operations and achieve small increases in its operating margins, it can have a big effect on returns on invested capital. That's because of the huge leverage associated with being able to generate sales. Remember, ROIC is the product of the margins and the sales velocity. It's those incremental returns across the high capital velocity that can turbocharge an investor's returns.

The Foolish bottom line
The Fool's Inside Value newsletter is built for speed. Advisor/analyst Philip Durell understands the benefits of owning Speed Demons at good prices, and he believes he might have found such a turbocharger in Dell (NASDAQ:DELL). If you want access to other stocks that could rev up your portfolio, we invite you to come take a test drive around the Inside Value track as our guest for 30 days. It's free, and once you're in, you too will feel the need for speed.

Up next: Margin Hogs
Speed's not the only way to play the ROIC game.

Fool David Meier does not own shares in any of the companies mentioned. Dell is also a Motley Fool Stock Advisor pick. The Motley Fool has a disclosure policy.