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 one 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 stocks -- 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 legendary 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 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:

25% off (twice)
I will admit that it's early to consider Red Robin a great company, especially with some of the troubles it's had recently. The chain, founded in 1969, is relatively small, is still growing, and competes in a tough market. However, it's a wonderful restaurant with a niche in the burger world.

As I mentioned, there have been a few stumbles along the way. In August 2005, the company announced the "retirement" of its chairman and CEO, updated its guidance, and told investors it was working with the SEC on an internal audit. There's nothing like some trouble and uncertainty to cause a single-day drop of 23%.

The next stumble came in January when it announced it would miss its sales and earnings targets, leading to a 27% drop.

Was it darkest right before the dawn? Perhaps. It's still too early to tell. But investors have had the opportunity to buy shares at an enterprise-value-to-sales ratio as low as 1.2, which is a good price for a growing company in a nice niche and improving its operations.

75% off
Sticking with the burger theme, CKE Restaurants, owner and operator of Hardee's and Carl's Jr., found a way to turn itself around after falling out of favor in 2002.

In 2000 and 2001, Hardee's was losing its identity. Was it known for burgers? Fried chicken? Breakfast sandwiches? It was all over the place and losing ground. And while McDonald's was adjusting its menu to meet changing customer needs and ramping up new ideas like its amazing Chipotle (NYSE:CMG) business, which would be spun out at the beginning of 2006, CKE took a different route. It got back to basics, albeit on "steroids," with its Six-Dollar, Monster, and Thick burgers. Talk about a calorie-heavy breath of new life!

85% off
Electronics retailer Circuit City faced its own identity crisis by lacking focus on its core operations. Circuit City was an electronics retailer that owned auto dealer CarMax (NYSE:KMX) and had a credit card financing division. Unfortunately, being spread out made it easier for rival Best Buy (NYSE:BBY) to get the best of it.

CarMax was spun off in 2002, and Circuit City sold its financing division in 2004, allowing it to concentrate on its retail operations. The turnaround continues, and I'm kicking myself for not pulling the trigger and buying the stock, which, as you can see from the returns, has recovered very nicely.

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

Today, Dell (NASDAQ:DELL) is a favorite among value investors. Despite its difficulties, Bill Miller, Mason Hawkins, and others believe it has a strong franchise that creates value. Motley Fool Inside Value lead analyst Philip Durell thinks so too, recommending the company on multiple occasions. Could Dell be a 50% off opportunity?

On sale tomorrow ...
What will be the next big bargain uncovered by Philip Durell and the Inside Value team? The only way to find out is to take a free trial today to see the candidates. Click here to see what they are.

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

Fool editor and Inside Value team member David Meier does not own shares in any of the companies mentioned. You can view his profile here . CarMax and Dell are Inside Value recommendations. Best Buy and Dell are Stock Advisor selections. The Motley Fool takes itsdisclosure policyvery seriously.