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 advocated, 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.

35% off
Johnson & Johnson's products have probably touched all our lives at some point. Not just a Band-Aid maker, the company develops drugs and products that play a huge role in helping people get -- and stay -- well.

But July 2002 was not a good month for Johnson & Johnson. The Federal Drug Administration and the Justice Department launched a criminal investigation into the quality of its anti-anemia drug Eprex after the drug was linked to serious illnesses in Europe and Canada.

That typically doesn't help your share price. However, if you were able to diagnose this as a great company that could recover from the trauma, you could have earned a 45% return. And with Johnson & Johnson's current problems -- a result of Boston Scientific (NYSE:BSX) trumping its acquisition bid for Guidant (NYSE:GDT) -- you have to wonder if it is headed for bargain territory once again.

60% off
Automatic Data Processing, which provides a plethora of transaction processing services, has been a darling of Wall Street for a long time. In fact, its track record of quarterly revenue growth is well known (162 consecutive quarters through 2002), as is its growth in earnings and cash flow.

But even great companies stumble. And in March 2003, the company announced it would miss expectations for 2003; it subsequently lowered its guidance. Although the market seemed to anticipate this, the stock was still knocked down to its low on the day of the announcement.

Had you bought at the height of the panic rather than at the height of lofty expectations, you'd be sitting on a cool 71% gain today.

95% off
The Enron collapse took down many energy giants, including Calpine, Dynegy, AES, and El Paso. All of them watched their stock prices drop 90% from all-time highs.

Calpine's problem was in overpaying for its generation assets and then not being able to produce meaningful revenues from them. Yeah, value destruction.

Don't get me wrong. El Paso had plenty of troubles of its own, including overstating its natural gas reserves, manipulating natural gas markets, restating its financial statements, declining credit ratings, a large debt burden, and class action lawsuits. However, despite the issues, El Paso's assets continued to generate cash flow. Value creation.

Today, as it tries to get its balance sheet in order, Calpine is on the verge of bankruptcy. El Paso? It's still getting back on track. But fire-sale buyers who bought near the bottom are up 250%!

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

Given the uncertainty surrounding its future growth prospects, First Data (NYSE:FDC) may be an interesting opportunity today. Berkshire Hathaway has owned shares for a while, presumably bought by investing guru Lou Simpson, and great value investor Jeremy Grantham has been buying shares lately. In fact, Philip Durell, advisor/analyst of the Fool's value investing newsletter service, has laid out the investment case for First Data twice. So maybe it's one of those companies selling for 30% to 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 debuted 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 company mentioned. The Motley Fool has a disclosure policy .