Mayhem, Trouble, Disaster ... Perfect!

Are you looking for a simple -- but profitable -- investing strategy? Try this one on for size:

1. Identify a Rule Maker.
2. Buy it at a low price.
3. Make money.

Step 2 is the hard part, because Rule Makers -- strong companies with dominant positions in their respective industries -- rarely trade for bargain prices. Just ask anyone who's been waiting to buy Coca-Cola (NYSE:KO) -- the beverage behemoth has maintained an average P/E of more than 25 for the past 10 years.

You might get the (right) impression that finding an undervalued Rule Maker is like finding an Armani suit for $20. Of course, if you did find that kind of bargain, you'd snap it up in a heartbeat -- which brings us to burgers.

A sizzling tale
In 2002, Fool senior analyst Bill Mann found a tasty opportunity that he couldn't pass up: McDonald's (NYSE:MCD) was sliding faster than cheese off a red-hot grill. Its disastrous "Made for You" program had slowed service, and franchisees were out of control.

While Wall Street "grimaced" at the big McMess, Bill saw that the company could fix these problems and still dominate the quick-serve industry. Here's what he found:

McDonald's offers everything we would want in a Rule Maker: an unparalleled brand, excellent historical growth, competitive advantages, and a legacy of doing one thing extremely well -- delivering meals to customers quickly and inexpensively. This is also a company that has failed to meet its earnings goals for two consecutive years and has a management team that seems to be making it up as it goes along. The stock has responded by dropping more than 45% over the last year.

Perfect.

Yes, we said "perfect." We see people abandoning McDonald's as an investment, disgusted at the company's recent performance. And yet, McDonald's, a top-line company that is presently in disfavor, is exactly the type of opportunity we are looking for as Rule Maker investors.

When a Rule Maker like Mickey D's hits a bump in the road (and the Street begins a selling frenzy), ask yourself whether these are temporary problems in an otherwise solid company. If they are, you could be looking at an amazing investment opportunity.

So was Bill right? (Hint: Bill's one of the sharpest guys around.) In December 2002, Jim Cantalupo came out of retirement to lead a remarkable turnaround at McDonald's in a short time. He scaled back growth, revitalized the menu, and led a fresh, innovative marketing campaign.

Over the past five years, McDonald's has racked up an 87% return, trouncing the market's 52%. That's Rule Making at its finest.

Where's the next juicy investment?
If you missed that opportunity, there will be others. We've even pulled together a handy list of criteria to help you find them. The first two criteria are "must haves," while the rest are nice, but not mandatory. Remember, we're looking for strong, dominant companies that are trading for bargain prices.

• Sustainable competitive advantage
• Dominant position in its industry
• Strong financials and cash flow generation
• Great management
• Reasonable stock price

Some world-class companies have underperformed the market over the past year, just like McDonald's did in 2002. Take a look at a few:

Do these hold the same kind of profit potential? We won't know for sure without further research, but this list of potential Rule Makers is a great place to start. 

If you don't have time to do the homework, our analysts have already scoured the market and found five undervalued Rule Maker companies. They poured all of the scintillating details into a new report, The New Rule Makers: 5 Power Stocks You'll Never Want to Sell -- and if those five companies aren't enough, there's even a bonus recommendation, along with a slew of investing tips.

You can get your copy of the report by clicking here.

Yahoo! and FedEx are Stock Advisor recommendations. UPS is an Income Investor recommendation. Coca-Cola is an Inside Value pick.

Neither Joey Khattab nor Cindy Embleton owns shares of any company mentioned, but they both like their disclosure policy lightly charred, no pickles.