Mystery of the multibagger
Want to know the secret of 600% returns?
Here it is: They don't come all that often, and anyone who claims to have a formula for consistently snagging them is probably pulling your leg.
Kind of a let-down? OK, then let me share with you the story of one 600% gainer that I'm familiar with -- a little company called Quality Systems
Case in point
When Tom Gardner recommended Quality Systems in Stocks 2003, our annual special for that year, it had none of the buzz of the stereotypical multibagger we think we know. No consumer craze, no press-friendly story, no daily appearance on the bubblevision. Instead, Quality was a leader in the boring business of providing medical-records automation, and it was, of all things, profitable.
Even more important, it was cheap, trading at only 15.6 times free cash flow -- probably the result of the core business having experienced flattish revenue growth, which masked the fact that an up-and-coming division would power more growth in the coming years.
Boring gets the job done
That's it. No glitz. No glamour. But only four years later, the stock is worth 600% more than it was when Tom recommended it. And much of that gain is owed precisely to Quality's being in such a boring business. As Lynch, Buffett, and other master investors have often said: Multibaggers come from places no one expects.
Don't believe me? Take a look at a few other boring companies that, like Quality Systems, have earned greater-than-600% returns since 2003:
|
Company |
Return Since 2003 |
|---|---|
|
American
Tower |
944% |
|
Trimble Navigation |
818% |
|
Quilmes Industrial |
626% |
There you have it
So, to recap, look for:
- Boring companies with growing cash flows and ...
- Trading for reasonable prices.
That's "a" secret to 600% returns -- it's not, however, "the" secret. Another let-down, right?
Well, you could also have made a killing buying any number of cyclicals, including steelmaker Mittal Steel
So for my money, I'll let the growth-chasers chase growth. The odds just aren't as good. In fact, when I look back at the history of the Stocks 0X series, I see that many of our best returns come in the most boring businesses: Cemex
To me, that's merely more proof of one of the most important investment lessons I ever learned: Boring is beautiful, and it's often very lucrative.
Foolish bottom line
It's the end of the year, a new one's around the corner, and a lot of folks out there are going to promise you a lot of things with their investment advice. They're going to promise you the next Microsoft, Hansen Natural, or whatever other head-turner they think will get your attention. They'll offer you the inside track on the latest hot companies that will stack money up to the rafters in your new mountain home and get you that 8-foot plasma screen.
Though I'm the editor of Stocks 2007, I'm not going to join in the claim game. It's just not my style. I'm as boring as the stocks I admire. I won't promise you 600% returns, or even a double. Heck, I won't promise you a 50% gainer, though a pair of our 2006 picks did a lot better than that.
If you want to take a look at our latest stable of potential market beaters, Stocks 2007 is just a click away. I make no promises, other than this: We've looked for solid, maybe even boring, stock ideas, well-researched, and many of them in the kinds of boring and unloved businesses that provided those huge returns for Quality Systems. And they come from the same folks who've made those market-beating picks all these years, including Fool co-founder David Gardner, and another yawn-worthy health-care pick from his brother, Tom.
At the time of publication, Seth Jayson was long Microsoft common and calls, but had no positions in any company mentioned here. View his stock holdings and Fool profile here. Activision, Cemex, and Quality Systems are Motley Fool Stock Advisor selections. Microsoft is a Motley Fool Inside Value recommendation. Mittal Steel is a former Inside Value pick. Akamai is a Rule Breakers pick. Fool rules are here.
