The Next Big Bargain

The market offers up bargain opportunities every day. We don't always know what the opportunity will be, 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 Lynch 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.

While we should follow his example and look for the best opportunities in any form -- growth stories, turnarounds, misunderstood stories -- there's one type that can be particularly rewarding.

Limited-time-only sales
The best companies grow steadily year after year, right? Wrong. Great companies have plenty of miscues along the way. But the truly great companies recover.

If step one on the road to great returns is to invest in great companies, we have to know what it takes to be great. Read Built to Last or Good to Great by Jim Collins. Read Common Stocks, Uncommon Profits by super-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.

We'd all be rich if the only thing investors had to do was identify great companies. The second key, as Buffett advocates, is to buy them when they're on sale. And when do they go on sale? When there are problems.

At Inside Value, we know it's difficult to purchase companies surrounded by negativity. But if we can, the market offers the opportunity for big rewards if the problems are only temporary.

Here are some recent examples of great companies selling at discount prices for a limited time.

30% off
Teva, the generic and branded drug manufacturer, got swept up in the Celebrex and Vioxx issues at Pfizer (NYSE:PFE) and Merck (NYSE:MRK), respectively. Like it or not, the market soured on the pharmaceutical industry.

And that offered investors an opportunity to pick up a company with a strong history at a decent bargain. And those who did have been amply rewarded.

50% off
In 2001 and 2002, Petsmart was growing like gangbusters. It was opening up new stores, growing sales, and rolling out new services. All was going very well.

And then it missed expectations in its 2002 fourth quarter and warned that it was going to miss its 2003 first quarter numbers as well. We all know how the market feels about missing expectations.

But if you were able to look under the near-term miss, you found a good company serving a growing market. It's tough to buy after the market gives a company a 22% haircut. But buying on-sale is the best way to generate great returns.

99% off
Corning, a company with a long history, got caught up in the tech bubble. While it did an amazing job of putting its fantastic research and development staff to work to manufacture fiberoptic cable and optical communications equipment, it got too far ahead of demand. And being locked in a race with JDS Uniphase (NASDAQ:JDSU), who also supplied optical communications equipment to customers laying down the next communication backbone, only made supply matters worse.

The quest for more fiber giveth -- and the fiber glut taketh away.

Fortunately, Corning is about more than just making fiber, thus allowing the business to get back on track.

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

Dell (NASDAQ:DELL) has been down recently. Gross margins have been falling. This leaves investors wondering about a few things. Are prices falling faster than costs? Is Dell losing some of its bargaining power?

Philip Durell, lead analyst at Inside Value, doesn't see it that way. He says Dell's fantastic fulfillment system, which delivers semi-customized PCs to customers at incredible prices, generates an amazing amount of cash. That's why Philip recommended this great company at a time when it is going on sale.

Ron Muhlenkamp and Mason Hawkins, two fantastic value investors, seem to think the market is improperly discounting the current issues as well. They continue to add Dell to their portfolios, further evidence that Dell is selling for 30% to 50% off.

On sale tomorrow ...
Who will be tomorrow's next big bargain? The one 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 Fool Inside Value debuted today at 4 p.m. EST. If you'd like to take a peek at today's newest picks, sign up for 30-day guest pass. What could be a better value than getting a free look at two recommendations that could be the next big bargains?

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. Pfizer and Dell are Motley Fool Inside Value recommendations. Merck is a Motley Fool Income Investor recommendation. The Motley Fool has adisclosure policy.