Investors always like a winning story. Impressive long-term returns from profitable companies captivate us and serve as a guide for finding the next great stock. Investors in enterprise-software magnate Oracle
And while there is much debate today as to whether Oracle will continue to beat the market, there are many alternatives to profiting from a company that has already proved itself a winner. Riding the coattails of an industry leader can sometimes be even more profitable for investors, but it helps to know where to look first.
Finding the tail on this coat
No doubt about it -- Oracle is a driving force in the field of enterprise-management software and has shown great success in snapping up companies and merging them into operations. What the $100 billion company lacks in terms of organic growth, it makes up for by buying complementary companies, as it recently did with Agile Software for $495 million. So how would an investor spot compelling investment opportunities that would share in Oracle's success? If we can nail down some companies profiting from the burgeoning ecosystem that Oracle is driving, maybe we'll find a hidden treasure worthy of investment.
But I think conventional wisdom about coattail companies is sometimes too limited -- typically, investors think these are simply direct suppliers or partners with a giant like Oracle. Of course, some investors may consider investing in prime competitors SAP
Smaller companies have lots of ways to drive great returns from a booming sector as well -- and not by just positioning themselves for a buyout at the hands of Oracle or its peers. For instance, a company may address an overlooked niche in a related market or even offer a competing product or service that has a price advantage. This is where Motley Fool CAPS can really help; the massive Foolish stock database has lots of tools for finding and researching stocks and stock pickers.
Tagging along with CAPS
With CAPS, investors can look through Oracle's tag list for other companies sporting similar attributes. For instance, Oracle falls under tags such as "Software," "Top Brands 2006," and "Application Software." Links to Motley Fool news, analysis, and discussion boards are also at your fingertips.
Another powerful tool in the CAPS community comes in the form of comments that investors share. Oftentimes, the commentary contains peer analysis and recommendations for other related companies. These resources occasionally turn up companies that have little or even no direct connection to Oracle but contain similar qualities or attributes that could make them attractive investments.
Perusing the tags, comments, and blogs could lead an investor to the likes of wireless-communications software maker Smith Micro
Another interesting prospect is online gaming and gambling firm Cryptologic
Of course, plenty of coattail investments have proved to involve shallow companies or copycats that ultimately flopped for investors. For this reason, CAPS is best used as a research tool and a means to find investments, and not a device to pick stocks for you. Investors should always perform their own due diligence on companies rather than taking a blanket recommendation. But you can't beat the information and resources for the price -- which, by the way, is free.
Is there another stock you know about that has Oracle's wind in its sail? Give your own opinion in Motley Fool CAPS.
Cryptologic is one of dozens of small caps that make up the Motley Fool Hidden Gems newsletter service's recommendations of market-beaters. To see what other companies Tom Gardner and company have picked lately, check out a free 30-day trial.
Fool contributor Dave Mock has never worn a coat with tails, and he prefers the waiter style. He owns no shares of companies mentioned here. Vodafone is an Inside Value choice. Cryptologic is a Hidden Gems pick. Dave is the author of The Qualcomm Equation. The Fool's disclosure policy is imitated but never duplicated.