The Next Big Bargain

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

Master investor Peter Lynch said that one advantage of running Fidelity Magellan (FMAGX) was its charter. It was a capital appreciation fund, giving Lynch the flexibility to buy in any investment situation. 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 stocks-- one type of investment 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 the initial step on the road to great returns is to invest in great companies, we must first 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 the market offers the opportunity for big rewards -- if those problems are only temporary. Here are some recent examples of great companies selling at discount prices for a limited time:

Company

Low Date

Low Price

Return From Low

PetSmart (NASDAQ:PETM)

March 2003

$9.90

197%

CKE Restaurants (NYSE:CKR)

October 2002

$3.01

437%

Corning (NYSE:GLW)

October 2002

$1.10

2,039%

Data provided by Capital IQ, a division of Standard & Poor's.

50% off
In 2001 and 2002, PetSmart was growing like gangbusters. It was opening up new stores, increasing sales, and rolling out new services. All was going very well.

And then it missed expectations in its 2002 fourth quarter and warned that it was going to miss its 2003 first-quarter numbers as well. We all know how the market feels about missing expectations.

But if you were able to look under the near-term miss, you found a good company serving a growing market. It's tough to buy after the market gives a company a 22% haircut. But buying on sale is the best way to generate great returns.

75% off
CKE Restaurants, owner and operator of Hardee's and Carl's Jr., found a way to turn itself around after falling out of favor in 2002.

In 2000 and 2001, Hardee's was losing its identity. Was it known for burgers? Fried chicken? Breakfast sandwiches? It was all over the place and losing ground. And while McDonald's (NYSE: MCD  ) was adjusting its menu to meet changing customer needs and ramping up new ideas like its amazing Chipotle (NYSE: CMG  ) business, which would be spun out at the beginning of 2006, CKE took a different route. It got back to basics, albeit on "steroids," with its Six-Dollar, Monster, and Thick burgers. Talk about a calorie-heavy breath of new life!

99% off
Corning, a company with a long history, got caught up in the tech bubble. While it did an amazing job of putting its fantastic research and development staff to work to manufacture fiber-optic cable and optical communications equipment, it got too far ahead of demand. And being locked in a race with JDSU (Nasdaq: JDSU  ) , which also supplied optical communications equipment to customers laying down the next communication backbone, only made supply matters worse.

The quest for more fiber giveth -- and the fiber glut taketh away.

Fortunately, Corning is about more than just making fiber, thus allowing the business to get back on track.

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

Though First Marblehead (NYSE: FMD  ) has had a wild ride over the past few years, we like the stock at Motley Fool Inside Value.

First Marblehead's revenue used to come from two main sources. Losing one (or both) was a huge risk. Fortunately, management has diversified its revenue streams. There are also fears about the Sallie Mae acquisition completely disrupting the competitive landscape and concerns over aggressive accounting. Those fears have weighed the price down even as the business continues to perform well.

Maybe that's why the company continues to buy back stock and why great value managers like Tom Brown from Second Curve Capital, Chris Davis from Davis Selected Advisors, and Larry Robbins from Glenview Capital Management have been buying. Apparently Inside Value lead analyst Philip Durell isn't the only one who thinks the stock is cheap.

On sale tomorrow ...
What will be tomorrow's big bargain? That's what Durell and his Inside Value team dedicate themselves to finding. 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 is no obligation to subscribe.

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

Million Dollar Portfolio Associate Advisor David Meier does not own shares in any of the companies mentioned. PetSmart is a Motley Fool Stock Advisor recommendation. Chipotle is a Rule Breakers and Hidden Gems selection. First Marblehead is also a Hidden Gems pick. The Motley Fool has a disclosure policy.


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