I've caught some flak from readers in the past who felt tricked into clicking on a headline.
"The One Stock You Must Buy," for example, turned out not be about a specific company, but rather the next small cap you could find that -- like both Microsoft (NASDAQ:MSFT) and Wal-Mart (NYSE:WMT) back in the day -- was led by a dedicated founder who owned a chunk of shares, was fiscally conservative and generating tons of free cash flow, and was profiting from a wide market opportunity.
Then there was "The Market's 10 Best Stocks," which weren't the 10 best stocks going forward, but the 10 best of the past 10 years.
To a point, I can sympathize. But I justify both of these headlines because they teach a valuable investing lesson: If you want to make big money in the market, you need to look at small, well-run companies.
The good news today, however, is that "Today's Hot Stock Tip" isn't a clever headline or a play on words. It's an actual stock you could buy today that I think is high on potential and low on price.
It also just happens to be a small, well-run company.
There's a legitimately good idea coming
Sure, you're probably skeptical. Why would I tell you my best idea when I could otherwise go out and buy it myself? If I'm right, after all, I could make a heckuvalot more money.
- I jumped the gun on this volatile market and have largely exhausted the cash I was hoarding. (See the CarMax (NYSE:KMX) shares I loaded up on at $17.)
- Thanks to this volatile market, I think there's plenty more where today's hot stock tip came from.
- I don't think most of you are going to listen to me anyway -- given that I just admitted to loading up on CarMax at $17.
With that preamble out of the way, you're primed for my idea. Here goes …
You've likely heard of it …
Tom Gardner recommended Columbia Sportswear (NASDAQ:COLM) to our Motley Fool Hidden Gems subscribers back in June 2005. Frankly, I didn't think it was a very good pick. (Back then, though, I didn't have the "senior" in my "senior analyst" title, so nobody much cared what I thought.)
The problem with the recommendation was that Tom had modeled for 13% annual revenue growth through 2010. But Columbia was a company that had struggled to get its footwear operations off the ground, had never sustained a greater than 13% annual growth rate for more than two consecutive years since going public, and was facing new competition in an economy that (back then) was flirting with recession. (We know what's happened since.)
In the three years since Tom highlighted Columbia, it's grown the top line at 5.5%, 11.4%, and 5.3%, respectively. As you might imagine, the returns haven't lived up to Tom's expectations. In fact, the stock is down.
This isn't to knock Tom, of course. Not only is he my boss (I love you, Tom), but he's made a lot of good picks over the years and advocates wide diversification. All I'm pointing out is that Tom Gardner liked this company a lot three years ago -- today it's cheaper, stronger, and poised to actually put up good numbers.
Allow me to explain
Footwear has long been both a problem and an opportunity for Columbia. Given the brand's appeal to the outdoorsy, hiking boots and other shoes should be an easy sell. But the products and marketing strategy haven't been up to snuff, and efforts have been trampled (pun intended) by names like Wolverine Worldwide's (NYSE:WWW) Merrell.
The company, however, has a new segment head in place -- Tim Bartel, who came over from Keen -- and a new technology called Techlite. Those two things should work to make the product more appealing. It also owns strong brands in Columbia, Sorel, and Montrail that cover multiple footwear segments.
Then there's the strategic shift that will see the company begin to open its own flagship retail stores rather than rely solely on retailers such as Dick's Sporting Goods (NYSE:DKS) and Nordstrom (NYSE:JWN). While its own retail sales won't displace sales to retailers, Columbia's stores should heighten its brand profile and allow the company to feature more premium apparel.
Finally, Columbia remains among the most shareholder-friendly and well-run companies out there. It's majority-owned by the Boyle family, it's cash rich, it pays a steady 1.7% dividend, and it's historically earned fantastic returns on invested capital.
Put it all together
Columbia is ripe for a turnaround. And while I won't be so bold as to forecast 13% annual growth over the next five years, the current valuation bakes in just 3% to 4% growth in perpetuity. I believe Columbia will do much better than that, and the company's balance sheet will continue to benefit shareholders through dividend payments and share repurchases.
So there's today's hot stock tip, and I hope you'll agree it's legit. If you'd like to take a look at the other small, well-run companies we're researching and recommending at Hidden Gems, click here to join the service free for 30 days. Despite Columbia's underperformance thus far, our collection of small, well-run companies is ahead of the market by more than 20 percentage points on average.
Tim Hanson owns (a lot of) shares of CarMax. Wal-Mart, Microsoft, and CarMax are Motley Fool Inside Value recommendations. Columbia Sportswear is a Hidden Gems pick. The Fool's disclosure policy is honest about recommending the gin & tonic on any hot summer day.