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 Select Comfort 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 current price.
I don't blame him for being excited: There's a lot to like about Select Comfort. The balance sheet has no long-term debt, returns on equity are near 40%, and the management team is deep and focused on delivering long-term shareholder returns. Even the price seems reasonable, given the recent decline caused by slowing sales growth and poor marketing execution.
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 how to fish?
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 prolonged 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 International Game Technology (NYSE:IGT), Lehman Brothers (NYSE:LEH), Kohl's (NYSE:KSS), or Target (NYSE:TGT), and you'll see what I mean. These companies have absolutely destroyed the market over their lifetimes, yet they've each had a few moments that caused investors to think twice.
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 long-term 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 despite its difficulties. 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 CDW (NASDAQ:CDWC) a few years back, and on Costco (NASDAQ:COST) a few years before that.
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 30 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. Costco and CDW are Motley Fool Stock Advisor recommendations. Like a drifter, the Fool's disclosure policy was born to walk alone.
