Investing legend Peter Lynch has taught me to keep my eyes open for investing opportunities wherever I go. That lesson really hit home for me when my wife and I honeymooned on a Mediterranean cruise in 2003. While it was a fabulous vacation we'll never forget, it was also my introduction to the tremendous power of Lynch's principles and small-cap value stocks.
Dinner for four
By luck of the draw, our table companions for dinner aboard the cruise included a gentleman named Lonnie Poole and his lovely wife, Carol. It so happens that Lonnie is the founder, the former longtime CEO, and a significant shareholder of tiny $150 million (at the time) Waste Industries
When we returned from our honeymoon, my wife suggested that we consider investing in Lonnie's company. As much as I enjoyed making the Pooles' acquaintance, I was unsure of whether that was a good idea. At the time, most of our money was invested in stable dividend-paying behemoths such as Bank of America
Plus, the 2000 tech wreck and subsequent bear market were still fresh in my mind, and as newlyweds with a fresh house and mortgage, we couldn't really afford to speculate on a micro cap. Yet I was thrilled that my wife took an interest in investing, so I promised her I'd research it, and, if it looked like a decent opportunity, that we'd buy.
Dumpster-diving for diamonds
I started looking at Waste Industries, and the more I examined the numbers behind the business, the more I liked it. The company had been profitable for decades, generated a tremendous amount of cash, and had just declared its first-ever dividend. Even better, the stock was trading for just a fraction above its book value. My wife and I gladly picked up shares for a measly three and a half times the operating cash flow. I mean, this was the waste business. It was not going to vanish if the economy went down, up, sideways, or in a loop-de-loop.
So with all of this going for it, why was Wall Street ignoring Waste Industries?
A Peter Lynch moment
The Street ignored it because it was a tiny company in an unpleasant business with a dull name. Garbage, for example, is not an industry that Wall Street analysts flock to cover. And the analysts who do cover the industry tend to focus on the giants in the field -- Waste Management
The stock also possessed a number of other traits that Lynch absolutely loved to find in a stock:
- It was cheap.
- It was run by a dedicated leadership team that owned a significant stake in the company. (Lonnie continues to own more than 25% of Waste Industries.)
The rewards that followed
Between its steadily improving dividend and relentless stock-price gain, my wife and I have almost doubled our money in Waste Industries in just two and a half years. Even better, thanks to organic growth and acquisitions, the company itself has gotten larger while we've been owners. And thanks to that profitable growth practice, its shares still look decently valued, at about six times trailing operating cash flow, even after their meteoric ascent.
That's the rewards potential of finding great small caps.
If being a partial owner of Waste Industries has taught me anything, it's that Warren Buffett was absolutely right when he said, "Risk comes from not knowing what you're doing." While my investment there was a clear no-brainer once I dug into the business, I must admit that finding other micro caps with profiles like Waste Industries is a skill I have not been able to reliably master.
Fortunately, Fool co-founder Tom Gardner and senior analyst Bill Mann make it their priority to actively seek and uncover tiny companies with similar winning profiles for Motley Fool Hidden Gems subscribers. And they've done quite well at it. Their collection of picks has outperformed the S&P 500 32% to 10% since 2003. If you'd like to have them help you find the next Waste Industries, click here to try the service free for 30 days. There is no obligation to subscribe.
At the time of publication, Fool contributor Chuck Saletta owned shares of Waste Industries, Bank of America, and General Electric. Bank of America is an Income Investor recommendation. The Motley Fool has a disclosure policy.