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 sectors 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:

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 believed in the management and the business model, he issued a sell recommendation because of AMG's valuation. But he continues to search for that winning trifecta every month.

Obscure, efficient companies in beaten-down industries are among those sought out by our Motley Fool Special Ops team, and there are many more under-the-radar stocks out there that offer even better opportunities. If special situations and deep value opportunities intrigue you, then take your investing to the next level in 2011 with Special Ops. Membership is strictly limited, so enter your email address in the box below to receive your invitation!