Mystery of the multibagger
Want to know the secret of 400% returns?
Here it is: They don't come all that often, and anyone who claims to have a formula for consistently snagging them is probably pulling your leg.
Kind of a letdown? OK, then let me share with you the story of one 400% gainer that I'm familiar with -- a little company called Quality Systems (NASDAQ:QSII).
Case in point
When Tom Gardner recommended Quality Systems in Stocks 2003, our annual special for that year, it had none of the buzz of the stereotypical multibagger we think we know. No consumer craze, no press-friendly story, no daily appearance on the bubblevision. Instead, Quality was a leader in the boring business of providing medical-records automation, and it was, of all things, profitable.
Even more importantly, it was cheap, trading at only 15.6 times free cash flow. That was probably due to flattish revenue growth in the core business -- which masked an up-and-coming division that would power more growth in the coming years.
Boring gets the job done
That's it. No glitz. No glamour. But only five years later, the stock is worth some 440% more than it was when Tom recommended it. Much of that gain is owed precisely to Quality's boring line of business. As Lynch, Buffett, and other master investors have often said: Multibaggers usually come from places no one expects. (If the expectations were rampant, the price wouldn't be cheap.)
There you have it
So, to recap, look for:
- Boring companies with growing cash flows and ...
- Trading for reasonable prices.
That's "a" secret to 400% returns -- it's not, however, "the" secret. Another letdown, right?
Well, you could also have made a killing buying any number of cyclicals, even giant, integrated oils like ExxonMobil (NYSE:XOM). But timing these is often much tougher than buying a boring cash producer. Post-bubble comeback highfliers such as Apple (NASDAQ:AAPL) have also returned much better than 400% since Quality Systems' run-up, but buying into them at their respective nadirs can involve a lot more uncertainty than did the cash-flow-rich, bargain-priced Quality.
So, for my money, I'll let the growth-chasers chase growth. The odds just aren't as good. In fact, when I look back at the history of the Stocks 0X series, I see that many of our best returns come in the most boring businesses: Cemex (NYSE:CX) (Stocks 2003, 150%) and 7-Eleven (Stocks 2004, 134%), for example. Two of Stocks 2006's most boring names, Brookfield Asset Management (NYSE:BAM) and Markel (NYSE:MKL) returned 75% and 58% respectively, in just two years.
To me, that's merely more proof of one of the most important investment lessons I ever learned: Boring is beautiful, and often very lucrative, too.
Foolish bottom line
It's the end of the year, a new one's around the corner, and a lot of folks out there will promise you a lot of things with their investment advice. They'll promise you the next Cisco, Microsoft, or whatever other marquee head-turner they think will get your attention. They'll offer you the inside track on the latest hot companies that will stack money up to the rafters in your new mountain home and get you that 8-foot plasma screen.
Though I'm a contributor to the Stocks 0X series, as well as a past editor, I'm not going to join in the claim game. It's just not my style. I'm as boring as the stocks I admire. I won't promise you 400% returns, or even a double. Heck, markets being what they are, I won't promise you a 25% gainer, though three of last year's picks did that or better.
If you want to take a look at our latest stable of potential market beaters, Stocks 2008 is just a click away. I make no promises, other than this: We've looked for solid, steady stock ideas, well-researched, and often in the kinds of boring and unloved businesses that provided those huge returns for Quality Systems. And they come from the same folks who've made those market-beating picks all these years, including Fool co-founders David and Tom Gardner. If you're interested in our top analysts' best picks for 2008, go ahead and take a look. As always, your purchase is risk-free.
An earlier version of this article was published Dec. 19, 2006. It has been updated.
At the time of publication, Seth Jayson was long Microsoft common, but he had no positions in any other company mentioned here. View his stock holdings and Fool profile here. Cemex and Quality Systems are Motley Fool Stock Advisor selections. Cemex and Brookfield Asset Management are Global Gains recommendations. Microsoft is a Motley Fool Inside Value recommendation. Fool rules are here.
