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 or small, constant or cyclical growth, asset plays, or turnarounds. 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.

All data from Capital IQ, a division of Standard & Poor's.

25% off
Rising fuel costs were on everyone's mind this summer. Both consumers and businesses, especially airlines, felt the pinch. FedEx was no exception as gross margins declined. Throw in some class-action lawsuits by drivers, competitive pressures from UPS (NYSE:UPS) and DHL, and a downward earnings revision in June and you have enough uncertainty to cause people to sell.

FedEx is a not a leader in its business without reason. It responded by tightening its belt on the operations side while finding ways to increase the volume of packages delivered. Remember that earnings revision in June? The company reversed it in September. Again, great companies find a way to get the job done.

70% off
During the stock-market go-go years in the late '90s, Home Depot was a company and a stock that could do no wrong. At its peak, the company traded at a frothy 72 times trailing-12-month earnings. Talk about your irrational exuberance!

But then the market's sentiment changed. Investors realized that Home Depot would have difficultly filling in its expectations as growth began to slow as the company's size increased. A change in expectations caused the stock to fall too far.

It seems as though investors forgot about Home Depot's growing margins and its cash-generation characteristics. Even during the price decline, Home Depot's gross margins increased steadily, and its operating margins rose too, albeit a bit jaggedly. Once investors remembered that Home Depot was a great business that knew how to get the job done, the stock price recovery began.

99% off
Eddie Lampert took control of Kmart during bankruptcy proceedings when conventional wisdom said the retailer was finished. But Lampert saw a set of stores and a distribution system still intact and picked up the whole operation for next to nothing.

Lampert then began reallocating capital by selling stores and remodeling others. And to be better prepared to take on Target (NYSE:TGT), Lampert used Kmart's stock as leverage to buy Sears and it wealth of brand-named merchandise. While the turnaround is far from over, Lampert is working to completely resurrect Sears Holdings into a cash-generating monster, generating impressive returns along the way.

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

Rent-A-Center (NASDAQ:RCII) has been down for good reason. Over the past few years, sales growth has been slowing due to decreasing same-store sales. All the while, margins have been declining. That's never a good combination for any company. Fortunately, the company seems willing to stop the push for growth at any cost and start closing underproductive outlets. That's a value-creation strategy not used by most investors. So it's interesting that value-investing mavens like Pzena Investment Management and First Pacific Advisors have taken notice, as did Motley Fool Inside Value Advisor/Analyst Philip Durell, who recommended the stock to subscribers in October. He believes it's one of those companies selling for 30% to 50% off.

On sale tomorrow ...
What 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 and the Inside Value team continuously look for that great bargain that will handily outperform the market.

Fortunately for you, the latest issue of Inside Value releases 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 companies that could be the next big bargain?

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

David Meier does not own shares in any of the companies mentioned. Home Depot is an Inside Value recommendation. FedEx is a Stock Advisor pick.The Motley Fool has adisclosure policy.