For My Next 20-Bagger

20-bagger. That's got a nice ring to it, doesn't it?

Do you think huge returns (I'm talking 10- and 20-baggers) only come from companies deemed "the next Microsoft?" Think again. I've got a 20-bagger in my portfolio from a company that's as glamorous as a tractor pull.

You don't need sexy technology stocks to generate huge returns. Big returns come from big bargain opportunities. In fact, the companies below aren't in glamorous industries, yet they've generated incredible returns.

Industry

Return From 2002 Low

NutriSystem (Nasdaq: NTRI  )

Consumer Services

241,000%

Titanium Metals (NYSE: TIE  )

Industrial Metals and Minerals

109,000%

Imperial Sugar (Nasdaq: IPSU  )

Confectioners

2,920%

Williams Companies (NYSE: WMB  )

Oil and Gas Pipelines

2,840%



How can we identify opportunities like these? That's what I want to share with you.

How did it happen?
In 2002, the Enron house of cards collapsed. The death blow wreaked havoc on energy companies, no matter the size of their energy trading organizations. It was a bad time to be holding merchant energy company stocks.

As an engineer designing gas turbines for power generation, I couldn't help but notice that AES (NYSE: AES  ) , Williams Companies, Dynegy (NYSE: DYN  ) , and Reliant (NYSE: RRI  ) were getting caught up in the carnage. But not all merchant energy companies are created equally, and after analyzing each of them, I thought the market was being particularly harsh on AES. Its assets were real and producing cash, and it had long-term revenue contracts associated with much of its generating output. Plus, many of its projects were financed with non-recourse debt. So if a power plant went belly-up, creditors could only make claims on that project and not the parent company.

Although AES was making power and collecting payments, the market priced the company as if it were going out of business. In fact, I estimated it was selling for around one-eighth of its liquidation value at its lowest point. That's a generous discount for an operating company. Sure, there were some issues -- a price-fixing investigation, South American currency concerns, a heavy debt load used to finance growth, and, yes, AES did have a small energy trading operation -- but the market was overly bearish about its future.

The secret of successful investing
Today, AES is a 20-bagger in my portfolio. Here's how you can find one of your own:

  1. Find opportunities in your circle of competence.
  2. Be greedy when others are fearful.
  3. Buy when your margin of safety is highest.

Does this formula for successful investing sound familiar? It should. Warren Buffett has been preaching it for quite some time. It's also the strategy we use at Motley Fool Inside Value to find great investment opportunities.

The Foolish bottom line
While this formula doesn't guarantee us 20-baggers, it does help us find investments that are likely to regularly beat the market. Hey, the results of Warren Buffett and Bill Miller, two value investors who tout this strategy, don't lie -- and neither do those at our market-beating Inside Value investing service.

If you'd like to see what the bargains we're finding today, click here to join Inside Value absolutely free for 30 days. There is no obligation to subscribe.

Fool contributor David Meier is an Inside Value team member and appreciates the knowledge Warren Buffett has shared. He owns shares of AES (you can see his profile here) but does not own shares in any of the other companies mentioned. The Fool takes its disclosure policy very seriously.


Read/Post Comments (0) | Recommend This Article (1)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 509297, ~/Articles/ArticleHandler.aspx, 9/16/2014 5:50:34 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement