Please ensure Javascript is enabled for purposes of website accessibility

A Triple in the Making

By Rex Moore - Updated Nov 11, 2016 at 4:44PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Learn to identify companies ready for a breakout.

America is talking about Affiliated Managers Group!

OK, not really. In fact, there's a good chance you've never even heard of this company. Yet its value more than tripled after Tom Gardner recommended it in Motley Fool Stock Advisor in September 2002. (He subsequently issued a sell recommendation -- more on that later.) What made this stock a success? Three main reasons, a couple of which are surprising.

1. Obscure company
Obscure, and rather boring, AMG is a holding company of mid-sized money-management firms from around the country. These businesses, which invest money in stocks for other people, include Essex Investment Management, Friess Associates, and Tweedy, Browne.

Most great success stories were unknown in the beginning. Even Wal-Mart garnered no excitement in its early days. But these under-the-radar companies can offer individual investors bargain prices.

2. Efficiently run
AMG has done a great job of assembling high-quality asset-management firms and leaving them largely autonomous. Yet all of the affiliates benefit from lower administrative costs, access to better technology, new product development, and diversified approaches across the company. In addition, incentives are tied to the performance of cash earnings per share. Haphazard or indifferent management doesn't cut it at AMG, and the result is a lean, efficient, and well-operated machine.

3. Bad industry
When Tom uncovered this solid business, it had been beaten down nearly 40% from its 52-week high. Of course, we were smack-dab in the middle of one of the worst bear markets in years, and the entire asset-management industry was hurting. Who cared about these companies anymore?

But because of top-notch efficient management, AMG was not only able to weather whatever the market threw at it, but it also was poised to reap big benefits when the market eventually turned around. The result: a quality company available at a bargain price.

The next AMG?
There are many other factors to consider when sizing up a potential investment. But if you can identify a company that's (1) obscure, (2) efficient, and (3) in an out-of-favor industry -- well, that's a beautiful thing. You may have found a stock that's beaten down well below its fair value and is ready to break out when the industry recovers. To illustrate, I selected a few industries that have hit the skids recently, and I screened for companies within those industries that had net margins and return on assets significantly better than industry averages. Here's a short list of such companies that now trade well below their 52-week highs:

Company

Industry

Recent Price

52-Week High

Chesapeake Energy (NYSE:CHK)

Oil and gas

$15.97

$74.00

Wells Fargo (NYSE:WFC)

Banks

$29.36

$44.75

Cameco (NYSE:CCJ)

Metal mining

$16.79

$44.00

BB&T (NYSE:BBT)

Banks

$27.40

$45.31

DuPont (NYSE:DD)

Chemicals

$25.60

$52.49

Teck Cominco (NYSE:TCK)

Metal mining

$4.70

$53.68

Foster Wheeler (NASDAQ:FWLT)

Construction services

$23.82

$85.65

Some of these aren't exactly obscure, but I wanted to include some bigger names you might like to investigate. All of these companies are presented for further research; this is not a "buy" list.

Foolish bottom line
After tripling in value, Affiliated Managers Group no longer carried a bargain price tag. Though he still believes in management and the business model, Tom issued a "sell" recommendation in March 2006 because of valuation concerns. But he continues to search for that winning trifecta every month.

The Stock Advisor service is now more than six years old. Tom and his brother David's recommendations have returned an average of 5%, while equal amounts invested in the S&P 500, by comparison, would have lost 24%. If you'd like to check out all of the formal Stock Advisor recommendations plus the top five stocks to buy right now, we're offering a special 30-day free trial. Click here to give it a whirl.

This article was originally published April 21, 2006. It has been updated.

Rex Moore salutes another of his former schools, Anderson High School in Austin, Texas. He does not own shares of any company mentioned. BB&T is a Motley Fool Income Investor recommendation. Chesapeake Energy and Wal-Mart are Inside Value selections. The Motley Fool is investors helping investors.

None

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$43.40 (0.49%) $0.21
Truist Financial Corporation Stock Quote
Truist Financial Corporation
TFC
$49.79 (0.08%) $0.04
E. I. du Pont de Nemours and Company Stock Quote
E. I. du Pont de Nemours and Company
DD
Chesapeake Energy Corporation Stock Quote
Chesapeake Energy Corporation
CHKA.Q
Cameco Corporation Stock Quote
Cameco Corporation
CCJ
$25.10 (-3.05%) $0.79
Teck Resources Limited Stock Quote
Teck Resources Limited
TECK
$31.11 (0.61%) $0.19

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
379%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/09/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.