The Next Big Bargain

The market offers up bargain opportunities every day. We don't always know what the opportunity will be, but finding one will supercharge your portfolio.

Master investor Peter Lynch said that an advantage of running Fidelity Magellan was its charter. It was a capital appreciation fund, giving Lynch the flexibility to buy in any investment situation.

And he took advantage of it! Big or small, constant or cyclical growth, asset plays or turnarounds. You name it, Lynch bought it.

While we should follow his example and look for the best opportunities in any form -- growth stories, turnarounds, misunderstood stories -- there's one type that can be particularly rewarding.

Limited-time-only sales
The best companies grow steadily year after year, right? Wrong. Great companies have plenty of miscues along the way. But the truly great companies recover.

If step one on the road to great returns is to invest in great companies, we have to know what it takes to be great. Read Built to Last or Good to Great by Jim Collins. Read Common Stocks, Uncommon Profits by super-investor Philip Fisher. Another master, Warren Buffett, offers his thoughts in his annual chairman's letters. Read those, too. Trust me; you'll learn what makes a company great.

We'd all be rich if the only thing investors had to do was identify great companies. The second key, as Buffett advocates, is to buy them when they're on sale. And when do they go on sale? When there are problems.

At Inside Value, we know it's difficult to purchase companies that are surrounded by negativity. But if we can, the market offers the opportunity for big rewards if the problems are only temporary.

Here are some recent examples of great companies selling at discount prices for a limited time.

33% off
During the second half of 2005, Dick's Sporting Goods decided to run a sale. Unfortunately, it wasn't just on merchandise. The sale started Aug. 16, 2005, when Dick's reported flat same-store sales for the quarter at its namesake stores and then revised its pro forma earnings estimate downward. That was good for a 16% discount in one day. The market continued to sour as it digested the news, sending the stock as low as $27.

Dick's is a rapidly expanding retailer that experienced some problems with its Galyan's acquisition. Apparently, sales came in under projections. But that's one of the drawbacks of playing the expectations game: If you set them too high and don't meet them, the market greets you with animosity.

But when a traditionally good operator makes a stumble and the market overreacts, opportunity could be knocking. Investors looking beyond the setback toward the future found a good price for a growing retailer that produces good returns on invested capital.

80% off
The digital age had a huge effect on investing. We'll go over two companies that were on the cutting edge early on, when their prices rose quickly based on their great stories ... only to fall when the initial shine started to wear off. The first example is Investment Technology Group, which provides pre-trade, trade, and post-trade technologies and brokerage services to help clients manage risk, execute trades, and monitor and control costs to maximize returns.

Growing as markets became more digitized, Investment Technology Group capitalized on the early success of the revolution. But things cooled off as clients began trading less. In December 2002, the company announced that it would miss its quarterly earnings estimates, and so it lowered guidance (have you picked up on a recurring theme here?).

But a change in the environment does not negate good technologies or a good business. Investment Technology Group had both, and the market recognized that over time

95% off
E-Trade's experience is similar. Sales and profits dried up as investors traded less when the bear assaulted the Street. Throw in stiff competition from Charles Schwab (NASDAQ:SCHW) and Ameritrade (now part of TD Ameritrade (NASDAQ:AMTD)) along the way and the sudden resignation of a greedy CEO, and it's easy to understand why investors fled to the exits.

But E-Trade had a strong following and excellent brand recognition, not to mention that it wasn't hanging its hat solely on brokerage services. It also offered online banking and mortgage services. So when the panic wore off, E-Trade and its new leadership were able to extract some nice profits from the valuable assets it had acquired, translating into some big gains for investors over the past few years.

Today's sales
I have pangs of regret about E-Trade's happy ending -- as a consumer of its products (I hold multiple E-Trade accounts) and someone who is familiar with its business, I still missed out on this undervalued opportunity.

Thank goodness there are plenty of other underappreciated, unloved, and misunderstood businesses in the stock market today to help me get over my grief.

Security software company Symantec (NASDAQ:SYMC) has had its fair share of problems lately. From the speculation that it overpaid for Veritas to the disappointing performance of selling bundled products to the revised earnings guidance, there isn't much love for the company. Despite the problems, Inside Value advisor Philip Durell thinks it's still undervalued.

And apparently he's not the only one. Checking the institutional ownership data for Symantec, Southeastern Capital Management, led by venerable value investor Mason Hawkins, now owns 27.7 million shares (just under 3%) of the company. That's a pretty big bet from a pretty good fund company.

On sale tomorrow ...
Who will be tomorrow's next big bargain? That's what Philip and the Inside Value team are dedicated to finding. If you'd like to take a peek at all his picks and research, sign up for a 30-day guest pass. What could be a better value than getting a free look at two recommendations that could be the next big bargains?

This article was originally published on June 24, 2005. It has been updated.

David Meier does not own shares in any of the companies mentioned. Symantec is an Inside Value recommendation. Schwab is a Stock Advisor recommendation. The Motley Fool has a disclosure policy.