I'd never heard anyone talk about a stock the way this guy was talking about Select Comfort
Well, that's not entirely true, but this SCSS shareholder I was chatting with recently was effusive in his praise. He loved the company, the competitive position, the management, the product, the growth prospects, and most of all, the price at which he bought shares (I'm guessing it was somewhere in the $12 to $16 range).
I don't blame him for being excited: There's a lot to like about Select Comfort. The balance sheet is strong, with $62 million in cash and no long-term debt; returns on equity are well north of 40%; revenue is increasing at a rapid clip and analysts expect that rate to continue (though the company did recently warn of slower fourth-quarter sales); and the stellar management team is focused on delivering long-term shareholder returns. Even the price seems reasonable, given the recent drop caused by that sales warning.
So there's your hot stock tip for the day: Select Comfort. (And I hope that satisfies the folks who were disappointed there wasn't one stock you must buy.)
Do you want a fish, or do you want to know
While Select Comfort may turn out to be a good stock tip, you can't keep just one stock in your portfolio. After all, something tragic and unforeseen could happen to the company -- like a sales slowdown.
Because if there's one thing that links all long-haul market outperformers, it's a precipitous decline. You heard me right. Pull up the chart for American Express
Those moments will continue to happen with Select Comfort, just as they've happened to the market's best stocks. So please don't stash all of your savings in the stock. It's got great prospects, to be sure, but there are very few -- if any -- sure things in the market.
So find more Select Comforts
Select Comfort is also unlike any other public company because it's the first and only four-time recommendation of our Motley Fool Hidden Gems small-cap investment service. But that alone shouldn't impress you. You should instead be impressed that Select Comfort continues to satisfy Fool co-founder Tom Gardner's strict small-cap investment criteria. These are small companies with:
- Solid management with an ownership stake.
- Great, sustainable businesses.
- Dominant positions in niche markets.
- Sterling balance sheets.
- Strong cash flows.
Select Comfort, of course, possesses these traits in spades. And if you dig up enough businesses that fit this model, I'll almost guarantee you a big winner.
Remember when I said it wasn't exactly true that I'd never heard anyone so effusively praise a stock? Well, I heard investors heaping the same praise for the same five reasons on Urban Outfitters
Both of those investments have worked out very, very well.
The Foolish bottom line
There are no better stocks than the small stocks that grow to dominate their markets. You can find them by looking for the traits mentioned above, or you can join us at Hidden Gems as we try to dig up two each month. Our portfolio is beating the market by 28 percentage points, and you can see all of our stock tips with a free 30-day trial.
After all, there's also no stock like the next stock.
This article was first published on Nov. 27, 2006. It has been updated.
Tim Hanson does not own shares of any company mentioned. Bank of America is an Income Investor choice. Wal-Mart is an Inside Value recommendation. Like a drifter, the Fool's disclosure policy was born to walk alone.