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:

30% off
When you're Teva, the generic and branded drug manufacturer, you're always in court at drug companies work to protect their patents. In early 2004, Pfizer (NYSE:PFE) filed a lawsuit to block a generic version of its Celebrex drug. Later that year, GlaxoSmithKline (NYSE:GSK) won a patent infringement suit over its anti-nausea drug Zofran. A few days later, Teva announced it was lowering it's guidance for 2005 to 2008. Like it or not, the market soured on the company.

And that offered investors an opportunity to pick up a company with a strong history of cash flow generation at a decent bargain. And those who did have been 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 fiber-optic cable and optical communications equipment, it got too far ahead of demand. And being locked in a race with JDSU (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.

Today, Microsoft (NASDAQ:MSFT) is a favorite among value investors. Relative to its multiples during the stock market bubble of the late 1990s, great value investors like Richard Pzena, Chris Davis, and even Martin Whitman think is a good bargain. Lead analyst Philip Durell is in good company with this recommendation as Microsoft looks like one of those companies selling for 30% to 50% off.

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.

David Meier does not own shares in any of the companies mentioned. Pfizer and Microsoft are Motley Fool Inside Value recommendations. GlaxoSmithKline is a Motley Fool Income Investor recommendation. The Motley Fool has adisclosure policy.