The Next Big Bargain

The market offers bargain opportunities every day. You won't always know what form these opportunities take, 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. To learn, read Built to Last or Good to Great by Jim Collins. Read Common Stocks, Uncommon Profits by super-investor Philip Fisher. Read the thoughts of another master, Warren Buffett, in his annual chairman's letters.

We'd all be rich if investors needed only to identify great companies. But the second key, as Buffett advocates, is to buy them when they're on sale. And when do they go on sale? When they face problems.

At Inside Value, we know it's difficult to purchase companies surrounded by negativity. But the market offers the opportunity for big rewards -- provided those problems are only temporary. Here are some recent examples of great companies selling at discount prices for a limited time:

Data provided by Capital IQ, a division of Standard & Poor's.
Returns as of June 2, 2008.

50% off
In 2001 and 2002, PetSmart was growing like gangbusters. It was opening up new stores, increasing sales, and rolling out new services. Then it missed expectations in its 2002 fourth quarter, and warned that it would 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. While McDonald's (NYSE:MCD) adjusted its menu to meet changing customer needs, and ramped up new ideas, like the amazing Chipotle (NYSE:CMG) business it would spin off 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 directing its fantastic research and development staff 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. 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.

American Express (NYSE:AXP) has had a wild ride over the past few years. Its credit card franchise is a wonderful business. Not only does it offer merchants access to high-net worth customers who love using their card, but it also owns the transaction network, helping it capture a good portion of the value it creates. And the stock sure looks cheap, too.

Maybe that's why the company continues to buy back stock, and why great investors like Davis Selected Advisors, The Capital Group, and Tweedy, Browne have been buying. Apparently Inside Value lead analyst Philip Durell isn't the only one who thinks the stock offers a great opportunity.

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. American Express is an Inside Value pick. The Motley Fool has a disclosure policy.