Ah, the Next Microsoft (NASDAQ:MSFT) ...
I wonder how many copies of financial magazines have been sold simply because the glossy covers promised that they had dibs on the Next Microsoft. I am guilty myself of getting sucked in from time to time by this siren's song ... and often finding an odd melange of companies that will be lucky to make it at all, let alone make it into the rarified realm of the superstocks.
There's a pretty obvious reason why so much time is spent chattering about the Next Microsoft or Starbucks (NASDAQ:SBUX) or Wal-Mart (NYSE:WMT) -- the potential gains are huge. Make a modest investment of $5,000 or $10,000 on one of the Nexts, and the after-tax gains could pretty much assure you a comfortable retirement.
The trouble with the Next Microsoft
Of course, it's not as simple as just picking a great company and then waiting for the riches to accumulate. The Next Microsoft will be difficult to hold for 10 or so years. It will have to move from new maverick to acknowledged 800-pound gorilla. There will be swoons and panics, and the stock will see declines of 15%, 20%, or maybe even 50% or more from time to time -- swoons that will make it hard to hold onto long enough to become a 10-bagger.
The next titan will also face the very real prospect of getting snuffed out in its infancy. A few moves here or there, and IBM might have quashed Microsoft or Dell. A little more foresight from McDonald's, and Starbucks might just be a modest chain of coffeehouses in the Northwest. A more forward-thinking and aggressive management team at Woolworth, ShopKo, or Pamida, and maybe nobody outside the South would have ever heard about Wal-Mart.
That's the trick with the next great superstock -- more often than not, the idea itself isn't unique. What ultimately makes the story unique is the combination of management vision and execution and unexploited opportunity in the market.
What the next superstock will look like
Even though every great company gives investors multiple chances to buy in, the idea is to find the Next Microsoft in the early days -- when a dollar or two's difference in the buy-in price ultimately translates into thousands of dollars down the road. So what are the traits to look for?
Semiobscurity and a hint of ridiculousness might be a good starting point. Who'd ever think of paying $4 for a cup of coffee? Who'd ever need or want a computer at home? How would a discount retailer ever compete against the name-brand stores that shoppers know and love? Among this ridiculousness, though, will be the hint of massive market potential -- but only if things go just right.
Accordingly, the next great company should also have some measure of controversy. There should be real questions about the ultimate size of the market, the potential for competitors to crush them outright, and how this team of so-called executives that nobody has ever heard of is going to compete against the denizens of the oak-paneled boardrooms.
It's important to remember, though, that there will never exactly be another Next. KrispyKreme was supposed to be the Next Starbucks -- it wasn't. Likewise for a whole host of software companies that hoped to parlay PDAs, networked appliances, and such into the Next Microsoft.
Said differently, the real Next Microsofts won't offer up an easy comparison to past companies. Microsoft, Starbucks, Wal-Mart -- all of them may have had similarities to companies that preceded them, but all of them had a unique twist or two that made straight comparisons to predecessors a little shaky.
Contenders
So where might the Next Microsoft come from? There's no shortage of candidates, and I'm sure we'll see superstocks emerge from industries largely thought of as sleepy, commoditized, or outdated. The key, though, is once again to focus on overall market potential and the unique time-saving, labor-saving, money-saving, or life-enhancing aspects that will make the company a success.
The health-care and technology sectors are perennial sources of potential big winners. The trick here is to find companies committed not just to getting one or two products to market but rather to developing a platform of technology that can foster ongoing innovation and product development. How about Intuitive Surgical (NASDAQ:ISRG) and the seemingly open-ended promise of its surgical robots?
But just because tech and health care are the obvious places to look, that doesn't mean there aren't other possibilities. Maybe, just maybe, American Eagle Outfitters (NASDAQ:AEOS) is on the way toward building a Gap-like stable of clothing retail brands. And what about the media mini-empire that Central European Media (NASDAQ:CETV) is building in Central and Eastern Europe?
Finding that king of the hill
Stalking big game like the Next Microsoft is exciting, but it's full of pitfalls and dangers. After all, for every biotech that makes it to profitability, at least 100 fail utterly. Likewise with medical technology, energy technology, and many more of the would-be next superstocks. Keep in mind that in some respects, we are talking about companies that are trying to change the world -- and that's a mighty large hill to climb.
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Fool contributor Stephen D. Simpson owns shares of American Eagle Outfitters but has no financial interest in any other stocks mentioned (that means he's neither long nor short the shares). Microsoft, Wal-Mart, and Dell are Motley Fool Inside Value recommendations. Starbucks and Dell are Motley Fool Stock Advisor recommendations. The Motley Fool has an ironclad disclosure policy.
