No stocks are "perfect" in the sense that they can be risk-free. Every single one of them goes up and down, and even monster winners of the past 10 years like Biogen Idec (NASDAQ:BIIB), which is up more than 1,100%, have suffered through precipitous drops of 50% or more -- three separate times in Biogen's case.
With that huge disclaimer out of the way, let's talk about what would make for a perfect stock -- at least as perfect as possible. Some might lean toward a stable and safe large-cap blue chip like Procter & Gamble (NYSE:PG), which has posted solid gains throughout the years -- the kind that will rarely cause you to lose sleep at night. Others may consider such a stock to be a nerve-racking, rocketing small-cap multibagger -- the kind Tim Hanson wrote about in "The Market's 10 Best Stocks."
I, on the other hand, see the perfect stock as somewhere in between. I look for stocks with market caps of less than $2 billion, so that the stock has plenty of room to reach 10-bagger status. I also require some degree of stability and predictability, with little chance of a bankruptcy that would torpedo my portfolio.
My perfect stock, in other words, would look just like Middleby (NASDAQ:MIDD) -- which was down some 9% yesterday after a seemingly solid earnings report. Sadly, I have yet to buy shares of this company. I fell victim to the kind of analysis paralysis I've warned others about, and I could never quite pull the trigger. I was always waiting for the stock to fall back a bit. That, combined with trading restrictions on companies we write about, has kept me from owning my perfect stock.
Bringing the heat
I hadn't heard of Middleby until Tom Gardner recommended it Motley Fool Hidden Gems more than three years ago. The company is easy to understand -- it makes commercial ovens and sells them to restaurant chains around the world. You'll find its products in places such as McDonald's (NYSE:MCD), Wendy's, and Papa John's (NASDAQ:PZZA).
And Middleby has indeed been the perfect stock for Hidden Gems subscribers. Tom recommended it three times: in November 2003, February 2005, and October 2005 -- and the stock is up more than 360%, 81%, and 30%, respectively.
What made it such a special small cap?
The mark of excellence
We can look back and identify three traits that propelled little Middleby to five-bagger status:
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Great leadership. Selim Bassoul rose through the company ranks, serving as president and chief operating officer of various subsidiaries before his promotion to CEO in 2001. He brought integrity, focus, and business savvy to the top post, with a strong emphasis on higher margins and consistent earnings growth.
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Focus, especially on strong global trends. Bassoul's valuable experience led him to make a gutsy decision several years ago to abandon the idea of serving the entire kitchen. He jettisoned such products as coolers and refrigerated deli cases to concentrate solely on ovens and toasters. There are some well-financed competitors in the industry, including subsidiaries of Illinois Tool Works (NYSE:ITW) and United Technologies (NYSE:UTX), but they don't carry the same laser-like focus. With all of its efforts thrown behind these high-margin and patentable products, Middleby has been able to ride the strong global trend of eating outside the home. More than half of all food dollars in the United States go toward eating out or fast-food pickup, and the rest of the world is heading that direction.
- High insider ownership. Our preference for companies with high levels of insider ownership is well-documented. More managers and directors with significant stakes in the business mean more decision-makers whose interests are aligned with us, the individual shareholders. A healthy 25% of Middleby is owned by insiders.
Toss in the fact that it was an obscure company in a boring industry -- something legendary investor Peter Lynch loved -- and you can see why it was loaded with potential. Any company with these traits selling at a reasonable valuation should garner serious consideration for your investment dollars.
Indeed, we search for such standouts every day in Hidden Gems. And so far, we've been well rewarded, with average total gains of 37% since the service began, versus 12% for the same amounts invested in the S&P 500. If you'd like to check out all of our small-cap recommendations, plus more than 20 valuable investing lessons, we're offering a special 30-day free trial. Click here to give it a whirl.
Rex Moore has never eaten gruel, but he's willing to try. Of the companies mentioned in this article, he owns shares of Procter & Gamble. Biogen Idec is a Motley Fool Stock Advisor recommendation. The Motley Fool has adisclosure policy.
