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 is sure to 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 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:

25% off
Rising fuel costs were on everyone's mind during the summer of 2005. Both consumers and businesses, especially airlines, felt the pinch. FedEx was no exception and watched its gross margins decline. Throw in some class-action lawsuits by drivers, competitive pressures from UPS (NYSE:UPS) and DHL, and a downward earnings revision in June 2005, and you have enough uncertainty to cause people to sell.

FedEx is a not a leader in its business without reason. It responded by tightening its belt on the operations side while finding ways to increase the volume of packages delivered. Remember that earnings revision in June? The company reversed it in September. Again, great companies find a way to get the job done.

50% off
Nike (NYSE:NKE) was a poster child for trouble in February 2000. Growth was slowing, the brand was searching for direction, and the world was questioning the company's labor practices in the Far East. No one wanted Nike at $13.50 per share.

But Nike just does it. It battled through PR problems, expanded product lines, and signed Tiger Woods, LeBron James, and a host of great young athletes to replace Michael Jordan. If you saw Nike's underlying greatness in 2000, you've handily beaten the market with 23% annual returns to date.

99% off
Eddie Lampert took control of Kmart during bankruptcy proceedings, when conventional wisdom said the retailer was finished. But Lampert saw a set of stores and a distribution system still intact and picked up the whole operation for next to nothing.

Lampert then began reallocating capital by selling stores and remodeling others. And to be better prepared to take on Target (NYSE:TGT), Wal-Mart, etc., Lampert used Kmart's stock as leverage to buy Sears and its wealth of brand-named merchandise. While the turnaround is far from over, Lampert is working to completely resurrect Sears Holdings into a cash-generating monster, garnering impressive returns along the way.

Today's sales
Within the market, there are plenty of underappreciated, unloved, and misunderstood businesses. Add the right catalyst, and you've got opportunity.

Technical services provider SAIC (NYSE:SAI) hasn't exactly been tearing up the charts since coming to the public markets. It's down from its all-time high. Master investors Barry Rosenstein and David Einhorn of JANA Partners and Greenlight Capital, respectively, recently increased the size of their ownership positions. They, like Inside Value, must continue to think the stock is cheap and smell opportunity.

On sale tomorrow ...
Who will be tomorrow's next big bargain? That's what Philip Durell and his Inside Value team are dedicated to finding out. If you'd like to take a look at the stocks we're recommending today, click here to join our community free for 30 days. There's no obligation to subscribe.

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

Retail editor and Inside Value team member David Meier does not own shares in any of the companies mentioned. FedEx is a Stock Advisor selection. UPS is an Income Investor pick. SAIC and Wal-Mart are Inside Value recommendations. The Motley Fool has a disclosure policy.