I was so close to recommending eBay (NASDAQ:EBAY) as my recommendation for Stocks 2007, The Motley Fool's report on our best ideas for the upcoming year.
With one of the strongest business models out there trading at an attractive price, it was hard to pass it up. Yet, I found an even better opportunity for 2007.
How could you pass it up?
eBay is such a great business. I like that it has many locked-in customers, via the network effect. I am partial to those increasing returns on invested capital (ROIC), and I think it's a tough competitor. For instance, companies such as Amazon.com (NASDAQ:AMZN) and Google (NASDAQ:GOOG) have been trying to break eBay's stranglehold on auctions and transactions, respectively. Yet eBay has warded off Amazon's advances, and while the jury's still out on how well Google's Checkout tool is gaining traction, PayPal continues to grow.
Right now, you're probably wondering, "If one of the best businesses in the world was selling at a bargain, why did you pass it up?"
A big, fat pitch
I passed it up by listening to my investing heroes, Warren Buffett and Joel Greenblatt. Putting their most important contributions together, I've learned three important principles from these two gentlemen:
- Make sure you understand the business.
- Pay as little as you can for the highest returns.
- Make the biggest bets on the best opportunities.
As the retail editor at the Fool, I've had a front-row seat to watch the stock market punish many retailers this year. And while the horror movie has featured many victims -- including Pacific Sunwear (NASDAQ:PSUN) and Zumiez (NASDAQ:ZUMZ), which fell nearly 50% at one point during 2006 -- I've concentrated my efforts on determining which retailers deserved their falls and which were collateral damage.
It should be no surprise, given that retail is in my circle of competence, that I found what I think is an even better opportunity there. And get this -- it has many of the same characteristics I liked about eBay.
These include a loyal and growing customer base, rising ROIC, and, most important, given its stumble over the past year, the chance for me pay a considerably lower price for great returns.
So I am willing to pass on eBay, despite its attractiveness, because a nicer, fatter pitch came right into my sweet spot.
What's the company?
So what kinds of retail companies exhibit these characteristics? Wal-Mart (NYSE:WMT) is one. That's why it's been the talk of a number of well-known value investors such as Bill Nygren and Warren Buffett over the past few years. Lowe's (NYSE:LOW) has them, too.
I can't reveal my hand and tell you what I did pick for Stocks 2007, but I can tell you I didn't recommend Wal-Mart or Lowe's or any of the other companies I've mentioned here. If you'd like to find out what made me pass on eBay, as well as 12 ideas for 2007 from other Fool analysts, click here for more information about Stocks 2007.
And as you go hunting on your own in this new year, remember those three principles above and wait for big, fat pitches.
Retail editor and Inside Value team member David Meier does not own shares in any of the companies mentioned. He is currently ranked 341 out of 18,147 investors in Motley Fool CAPS. You can view his TMF profile for yourself. eBay, Amazon.com, and Pacific Sunwear are Motley Fool Stock Advisor recommendations. Zumiez is a Motley Fool Hidden Gems pick. Wal-Mart is an Inside Value selection. The Fool takes its disclosure policy very seriously.
