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.

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, Williams Companies, TXU Companies (NYSE:TXU), and Reliant were getting caught up in the carnage. Even Duke Energy (NYSE:DUK) couldn't escape it. 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, 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 the bargains we're finding today, click here to join Inside Value absolutely free for 30 days. There is no obligation to subscribe.

This article was originally published on Oct. 5, 2006. It has been updated.

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 profilehere) but does not own shares in any of the other companies mentioned. TXU and Duke Energy are Motley Fool Income Investor recommendations.Microsoft is an Inside Value pick. The Fool takes itsdisclosure policyvery seriously.