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.
|
High Date |
High Price |
Low Date |
Low Price |
Clos ing Price on 11/8 |
Ret. Off Low | |
|---|---|---|---|---|---|---|
|
GTECH Holdings (NYSE:GTK) |
4/22/04 |
$32.47 |
8/6/04 |
$19.79 |
$31.40 |
59% |
|
Redwood Trust (NYSE:RWT) |
6/2/97 |
$52.32 |
10/8/98 |
$10.16 |
$42.44 |
318% |
|
Williams Companies (NYSE:WMB) |
6/9/99 |
$53.15 |
10/25/02 |
$1.30 |
$20.52 |
1,478% |
30% off
In 2004 and early 2005, GTECH experienced slowing earnings growth. In addition, the company has spent heavily on R&D -- to the tune of 4.5% of sales. Fools understand that R&D, while an important investment for future returns, gets expensed through the income statement, putting further pressure on earnings. And last but not least, there was the lingering problem of the Brazilian lottery account.
Fortunately, Motley Fool Inside Value analyst Philip Durell saw through the temporary problems, worked to understand GTECH's business model, and found the value that others missed. He recommended GTECH in the May 2005 issue of Inside Value and has earned a 40% return thus far. Value hounds who found GTECH in August 2004 have earned 59%.
50% off
Redwood Trust, which originates, securitizes, and credit-enhances jumbo mortgages, was a growth darling right after it hit the public scene in 1995. But in the frenzy, Redwood got a bit ahead of its fundamentals.
In true bipolar fashion, the market priced shares at 50% of Redwood's book value in November 1998, despite the company's consistent ability to generate returns. At the time, the market was practically giving Redwood away. Unfortunately, I decided to go with a different investment. Sometimes you can lead a value guy to water, but you can't make him drink. Had I gone with my first choice, I'd be up 318%.
99.9% off
The Enron collapse took down many energy giants, including Calpine (NYSE:CPN), Dynegy (NYSE:DYN), AES, and Williams Companies. All of them watched their stock prices drop 90% from all-time highs.
Calpine's problem was in overpaying for generation assets and then not being able to produce meaningful revenues from them. Yeah, worthless.
Williams had troubles of its own, including allegations of price fixing, slowing growth, declining credit ratings, and class action lawsuits. However, despite those issues, most of Williams' assets were generating cash flow. Not worthless.
Today, Calpine continues to sell assets to get its balance sheet in order. AES, as I have noted in the past, is a 15-bagger today. And Williams? It's also back on track. Fire-sale buyers bought themselves another 15-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 Richard Pzena and Chris Davis think Microsoft (NASDAQ:MSFT) is a good bargain. So maybe it's one of those companies selling for 30% off.
Given the uncertainty surrounding Fannie Mae's future charter, past accounting issues, and its derivatives, is it any wonder its stock price is down? David Dreman thinks 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, deep discount to its intrinsic value?
Honestly, I don't know, yet. 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 FoolInsideValue released Wednesday at market close. If you'd like to take a peek at the two 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. Microsoft is an Inside Value recommendation. The Motley Fool has adisclosure policy.
