To the basement, please
Since we've just launched our new blue-chip report, to which I contributed a modest essay on what I consider to be an underloved powerhouse, I thought it would be interesting to take a look back at a lesson from my last foray in the field of Foolish special reportage, my pick for Stocks 2005.

On the surface, it looks like a disaster. Simply put, it's been a tough few months for shareholders in Ceradyne (NASDAQ:CRDN), the small, advanced-ceramics firm that was my choice for our annual year-end stock guide. Hey, I know all about the pain. I'm a shareholder too. Since the late $20s and up.

The basement is scary
After cresting at a split-adjusted $39 a share back at the end of December, the stock rolled down to below $18 per share before inching back up to the mid $20s these days. There's been a considerable amount of hand-wringing on Internet message boards, including ours, and a few direct calls for me, as author of the pick, to "explain" what people ought to be doing.

Unfortunately, Fool policy kept me from commenting on the situation most of the time, for the simple reason that I was taking advantage of the panic and solidifying my own position in the stock. We are, after all, just investors writing for other investors. Sometimes we write, but sometimes we need to put our money where our prose is.

A fumble or a touchdown?
Recently, the stock bounced upward on the news that Ceradyne received another $75 million worth of armor contracts from the military. My response? Kind of a yawn, actually.

Don't get me wrong. I'm glad to see the shares on the way back up, but I was completely unsurprised by the recent order, and anyone who was probably isn't following the company closely enough. This was simply business as usual.

Back in the first quarter, Ceradyne posted lower-than-expected earnings because the U.S. military asked it to send an upgraded version of its body-armor plates for soldiers. But this was actually good news in disguise. At the time, it was not only clear that the shortfall would be made up later in the year, but also that the newer plates would bring in more profits because the firm's prior acquisition of raw-material provider ESK Ceramics meant better gross margins on the higher-specification plates. Moreover, as a prime supplier of the component raw material (boron carbide), more of which is needed for the new plates, Ceradyne is positioned to benefit from plate contracts that go to its competitors. I love a team that makes money even when the other side scores points, but maybe I've gone batty.

If I haven't, the Street has, because the stock tanked and remained in the cellar, which just goes to show how much confusion there is among investors and even some analysts about what exactly it is that Ceradyne does. It's no mega-contractor like Boeing (NYSE:BA) or General Dynamics (NYSE:GD). Ceradyne is not even as defense-dependent as its larger peer, Armor Holdings (NYSE:AH), and it is also not much like vest provider DHBIndustries (AMEX:DHB). (Hot stock tip: If you think Ceradyne makes "bulletproof vests," you should put your money elsewhere.)

Back to basics
Ceradyne is foremost an advanced ceramics company. It makes a wide variety of products beyond defense, including industrial and automotive wear components and coatings that could be the wave of the future for engines from the likes of AB Volvo (NASDAQ:VOLVY) and Ford (NYSE:F). Industrial and automotive sales provided more than half of revenues in the first quarter this year.

While personal armor plate sales are currently providing much of the horsepower for growth, the firm's expansion into vehicle armor could provide even bigger boosts a couple of years down the road. This is a market that may soon be measured in the billions, and Ceradyne could get a significant chunk.

To make that long story short: Retrofitting our military's fleet with steel provides some protection, but comes with major problems including vehicle handling and wear. Harder and 50% lighter, ceramic armor can stop bullets without breaking your axles or making your truck flip when you make a sharp turn to avoid the guy with the rocket-propelled grenade. The military is just beginning to realize this, and Ceradyne is positioning itself to capitalize on the need for an improved solution.

The informed vulture
Because I knew that nothing was wrong at Ceradyne, and that, in fact, the growth story looked like it was getting better, I was able to keep my finger off the sell button during that big slide. At one point, I did blow with the breeze and hedged a portion of my position with some well-timed put options, but when I sold those for a good profit, I rolled the winnings back into some very cheap shares at $18. Those stubs have returned north of 35% in just a couple months, more than covering my losses from those heady days above $30. And I plan on holding them for a long time to come. I still expect a double from here within the next two or three years.

The moral of this story is this: Knowledge is power, and so is fortitude. In the end, knowing a company is more important than timing your purchase. If you like a stock at one price, and nothing has changed but the Street's sentiment, you should love it for 50% less. Having the guts to buy when everyone else is confused and afraid can erase your early losses in short order.

The Foolish bottom line
Keep this lesson in mind when you look over our monster stock picks for the next decade. Though we're talking about companies of vastly different sizes and resources, some things never change. These firms will not all shoot through the roof overnight. But they are all stalwarts that will probably be shunned by the Street at regular intervals despite their strengths. Getting to know them and buying them when Wall Street won't is a great strategy for earning market-beating returns for years to come.

For related Foolishness:

Seth Jayson loves investing in companies that others fear. At the time of publication, he had shares of Ceradyne but no position in any other company mentioned. View his stock holdings and Fool profile here. Fool rules are here.