In the past, I've mentioned our eternal efforts to uncover small companies that will eventually appreciate many times in value. The legendary Peter Lynch called such companies "multibaggers," and they are the real difference-makers in a lifetime of investing -- the ones that easily make up for mediocre and failed investments.

Just ask anyone who invested in Amgen (NASDAQ:AMGN) in 1990 and watched it eventually rise 41 times in value. Or how about those who saw the potential in a beaten-down Best Buy (NYSE:BBY) in 1990 and earned more than 200 times their original investment? A $5,000 investment then would have turned into more than $1 million today. In Motley Fool Hidden Gems, we actively search for unknown or unloved companies -- and even those that most investors consider broken.

Today, I thought it would be interesting to look at Audible, and why it turned into a seven-bagger for me over a relatively short period. It's especially interesting now, because the stock has taken several big swings since this column first ran more than three years ago, and the company was finally bought out by Its story offers a great example of how small-cap investing can really juice your returns.

Hear me now
Audible is the No. 1 provider of spoken-word content on the Internet. Besides audio books, it also provides daily newspaper and magazine articles, speeches, and various other nifty things. Users can download the content to listen to via encoded MP3 files on their portable player, burn the audio onto a CD, or just listen on their computer. Think of how handy it would be to listen to The New York Times or The Wall Street Journal on the way to work every morning!

In typical Lynchian fashion, I was a loyal Audible customer before I thought about the company as an investment. I commute to Fool HQ 30 minutes each way, and in 2000 I found that Audible's audio books not only made that time on the Capital Beltway fly by, but also educated, amused, and enriched me in ways I would never have imagined.

When I started, a $14.99 monthly fee allowed me to download two books each month. I was able to catch up on things I should have read long ago but never had the time. The Hobbit motivated me to read the entire Lord of the Rings trilogy. Jeffrey DeMunn's narration of Stephen King's Dreamcatcher was outstanding. Ernest Hemingway's The Old Man and the Sea was short but sweet. I just finished Tolstoy's epic War and Peace -- long but outstanding. I would never have discovered such gems as Ender's Game and Life of Pi if it weren't for Audible. All "told," some 100 books have passed through my now-ancient Rio 500 MP3 player and into my head.

Barely audible
During the great tech wreck, companies such as JDSU (NASDAQ:JDSU), CMGI (NASDAQ:CMGI), and Alcatel-Lucent (NYSE:ALU) lost more than 90% of their value, and many Internet-related businesses were wiped out completely. When I looked at Audible as an investment possibility, the stock was less than $1 per share, down from the $45 range after its 1999 IPO. The business had never been profitable and was in danger of running out of money and closing its doors. It was too risky for me then, but I kept an eye on it. Over the months, things began to stabilize somewhat. Sales growth, after decelerating from 1999 through 2002, began accelerating again. The stock price doubled from its lows. Many obstacles were left to overcome, but -- because of the strength of the product, high insider ownership, and the dedication of Chairman and CEO Donald Katz -- I believed the company would get past the bad times and flourish.

In September 2003, I bought in at $1.14 per share, before the reverse stock split. This was before I joined the Hidden Gems team, and unbeknownst to me, Tom Gardner placed it on his Hidden Gems Watch List in the October 2003 issue, citing a move toward positive free cash flow, non-dilutive management, top-line growth, and other improving fundamentals.

Since then, the company has rolled out 16 out of 17 quarters of positive cash from operations, a reverse stock split (which raised my cost basis to $3.50 per share), a relisting on the Nasdaq, a deal with Apple to get content in the iTunes Music Store and to make the hot-selling iPod players "Audible-ready," deals with Dell, Gateway,Hewlett-Packard (NYSE:HPQ), and others, and a stock price that has reflected all this good news.

A Gem-dandy
Amazon paid $11.50 per share for Audible, so I was well pleased with the final return on my investment, rocky though the ride was. I think it's instructive to look back at some of the characteristics that made Audible a Hidden Gems Watch List selection in the first place:

  1. After a period of decline, accelerating sales growth.
  2. High insider ownership.
  3. Non-dilutive, shareholder-friendly, dedicated management.
  4. Strong price appreciation potential based on Tom's valuation method.

Underfollowed and unloved
When we find companies like this at Hidden Gems, we become very interested and dig deeper, making sure that all the pieces of the puzzle fit together. This has led us to outsized gains in stocks like Walter Industries (NYSE:WLT) -- up 207% before we sold -- as well as and many others. All told, Gems selections are up an average of 36% vs. 11% for identical amounts invested in the S&P 500. If you're interested in our approach and want to receive two stock recommendations each month, Tom is offering a special 30-day free trial.

This column was originally published on Nov. 19, 2004. It has been updated.

Rex Moore is currently listening to The Road by Cormac McCarthy. Of the companies mentioned, he owns shares of Best Buy and Dell are Motley Fool Inside Value recommendations. Best Buy and Apple are Motley Fool Stock Advisor recommendations. is a Hidden Gems pick. The Motley Fool owns shares of Best Buy. The Fool has a disclosure policy.