A Triple in the Making

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 eventually issued a sell recommendation, though -- 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 midsized money management firms from around the country. These businesses invest money in stocks for other people, including 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 some 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 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, 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, anyway?

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

The next AMG? 
There are 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 ready to break out when the industry recovers.

To illustrate, I selected a few industries that have hit the skids in the past year, 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:

Source: Capital IQ, a division of Standard & Poor's, and Yahoo! Finance.

All of these companies are presented for further research; this is not a buy list.

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

These three signs of a great stock are among the many attributes Tom passed on when he founded Million Dollar Portfolio. This real-money service is building out a complete portfolio by investing $1 million of the Fool's own money -- with all trades announced before they're made so members can follow along. MDP will be opening to new members soon for one week only. Just click here for more information.

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

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Foolish analyst Rex Moore realizes that cheddar-stuffed deep-fried jalapenos are not just for breakfast anymore. He doesn't own any companies mentioned in this article. Covidien and Wal-Mart Stores are Motley Fool Inside Value recommendations. Intuitive Surgical and Mindray Medical International are Motley Fool Rule Breakers selections. The Fool owns shares of Medtronic and Wal-Mart Stores. The Motley Fool has a disclosure policy.