The Next Big Bargain

Every day, the market offers up bargain opportunities. We don't always know when one of those opportunities will occur or what form it will take, but finding one will supercharge your portfolio.

Master investor Peter Lynch said that an advantage of running Fidelity Magellan was its charter. It was a capital appreciation fund, giving him the flexibility to buy in any investment situation.

And he took advantage of it! Big, small, constant growth, or cyclical. You name it, Lynch bought it.

That is exactly how you and I should approach our portfolios. We should look for the best opportunities: growth stories, turnaround stories -- even misunderstood stories. The key is to understand the story and figure out how good the sale price is.

Limited-time-only sales
Great companies grow steadily every year between 10% and 15%. Right? Wrong! Great companies have plenty of miscues along the way. But the truly great ones recover.

The key, then, is to invest in great companies. Want to know what makes one great? Read Built to Last or Good to Great by Jim Collins. Read Common Stocks, Uncommon Profits by master investor Philip Fisher. Another master, Warren Buffett, offers his thoughts in his annual chairman's letters. Read those, too. Trust me; you'll learn what makes a company great.

But we'd all be rich if the only thing investors had to do was identify great companies. The key, as Benjamin Graham first discovered, is to buy them when they're on sale. And here are some recent examples of great companies selling at discount prices for a limited time.

25% off
Earlier this year, eBay experienced slowing user growth. Since bringing buyers and sellers together is eBay's business, it's easy to understand why investors could get nervous. Throw in Amazon.com (NASDAQ:AMZN) and Yahoo! (NASDAQ:YHOO) stepping up efforts for their own auction sites, and investors start heading for the exits.

But if you saw through the issues and worked to understand eBay's powerful business model, you could have profited from the panic to the tune of a nice 30% return.

50% off
In July 2004, Omnicare, a pharmaceutical distributor to long-term-care facilities, reported disappointing earnings. Since Omnicare was frantically defragmenting an industry by buying up smaller distributors, the disappointment hit the stock hard. Investors had to be questioning the merits of the strategy.

And a difficult hostile takeover bid of competitor NeighborCare kept the stock price depressed. Negotiations were tense, and neither side wanted to budge. But both sides came to an agreement in July 2005. And patient investors have seen the stock double off its low.

99.9% off
The Enron collapse took down many energy giants, including Calpine, Dynegy, and AES. All of them watched their stock prices drop off 90% from all-time highs.

Calpine's problem was in overpaying for generation assets and then not being able to generate meaningful revenues from them. Yeah, worthless.

But AES had revenue contracts for more than 70% of its generating assets. Granted, some of its plants were losing money, but most were generating cash flow. Not worthless.

Today, Calpine continues to sell assets to get its balance sheet in order. And AES? It's back on track. Fire-sale buyers bought themselves a 16-bagger!

Today's sales
Within the market, there are plenty of underappreciated, unloved, and misunderstood businesses. Add the right catalyst, and you've got opportunity.

Relative to its multiples during the stock market bubble of the late 1990s, great value investors like Bill Nygren and Wally Weitz think Wal-Mart (NYSE:WMT) is a good bargain. So maybe it's one of those companies selling for 25% off.

Given the uncertainty surrounding Fannie Mae's (NYSE:FNM) future charter, past accounting issues, and its derivatives, is it any wonder its stock price is down? Richard Pzena and David Dreman think it's a great bargain relative to its future. So does Philip Durell, having laid out the case for Fannie Mae as an investment earlier this year. Although it's a bit riskier, you may be able to pick up Fannie Mae for 50% off.

On sale tomorrow ...
Who will be tomorrow's next big bargain, the one that's selling at a deep discount to its intrinsic value?

Honestly, I don't know. But rest assured, Philip Durell and the Inside Value team continuously look for that great bargain that will handily outperform the market.

Fortunately for you, the latest issue of Motley Fool Inside Value is out today at 4 p.m. EST. If you'd like to take a peek at today's newest picks, sign up for a risk-free trial for 30 days. What could be a better value than getting a free look at two recommendations that could be the next big bargain?

This article was originally published on June 24, 2005. It has been updated.

David Meier owns shares of AES but of no other companies mentioned. Omnicare and Fannie Mae are Inside Value recommendations. eBay and Amazon.com are Motley Fool Stock Advisor recommendations. The Motley Fool has adisclosure policy.