An Investing Crystal Ball

As investors, we're all looking for a way to identify great investments. But we can't tell the future.

Nevertheless, there are indicators that can help us identify opportunities before the broader market. One of these is return on invested capital (ROIC).

Sparkling returns
If you've been around Fooldom for a while, you've definitely heard of ROIC. It's one of the tools hedge fund manager Joel Greenblatt outlines as part of his "magic formula" in The Little Book That Beats the Market. The number essentially measures the return that a company generates on every dollar of invested capital in its business -- and a high ROIC generally means a good business. An increasing ROIC, on the other hand, generally means an improving business. And that's our indicator of market opportunity.

Let's take a peek at some of the biggest growers of the past few year:

Data provided by Capital IQ, a division of Standard and Poor's.

All of these companies have increased ROIC every year over the past five years, and their returns have been phenomenal. That's because the companies weren't nearly as valuable back when they had lower ROICs. Their improving businesses caused the market to reassess their true values.

All that sparkles isn't gold
The market, however, is not always an efficient place. It has not yet caught on to every company with a growing ROIC. Take a look at Dell's (NASDAQ:DELL) plight, for example:

Data provided by Capital IQ, a division of Standard and Poor's.

Dell has trailed the market over the past year and risen by only 12 percent -- essentially moving with the market -- over the past five years, despite the upward slope of its ROIC, which has been consistently higher than that of competitors Sun Microsystems and IBM. In other words, this is an improving business that has not yet been recognized by the market.

Will Dell's stock price finally perform in 2006? No one can say. But given its ability to execute its strategy and improve its business, today's price does look like an attractive long-term entry point.

The Foolish bottom line
Dell is a superior business that is not being accurately valued by the market. Its ROIC and market trends simply don't square up.

That's one reason why Fool value guru Philip Durell recommended the company to subscribers of his Inside Value newsletter a few months back, and it's why he is optimistic about the stock going forward. Philip specializes in finding superior companies that the market just doesn't appreciate ... yet. This is a time-tested strategy that has helped Philip earn returns for his subscribers that are 4 percentage points ahead of the broader market.

While there's no way to tell the future, there are ways to find and buy superior stocks for less than they're worth. Click here for a free 30-day guest pass to Inside Value, and let Philip help you do just that.

Fool research analystShruti Basavarajuses her Magic 8-Ball to make most of her non-investing decisions. She owns no shares of any company mentioned above. Dell is also a Motley Fool Stock Advisor recommendation. The Fool has a strictdisclosure policy.