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
Rising fuel costs were on everyone's mind this summer. Both consumers and businesses, especially airlines, felt the pinch. FedEx was no exception, and watched its gross margins decline. 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.

50% off
Nike (NYSE:NKE) was a poster child for trouble in February 2000. Growth was slowing, the brand was searching for direction, and the world was questioning the company's labor practices in the Far East. No one wanted Nike at $27 per share.

But Nike just does it. It battled through PR problems, expanded product lines, and signed Tiger Woods, LeBron James, and a host of great young athletes to replace Michael Jordan. If you saw Nike's underlying greatness in 2000, you've handily beaten the market with 21% annual returns to date.

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 Wal-Mart (NYSE:WMT) and 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, garnering 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.

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 it's a good bargain. Philip Durell, advisor/analyst at Motley Fool Inside Value, is in good company -- he's recommended Microsoft three times, and it looks like one of those companies selling for 10% to 20% 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 owns shares of Nike but does not own shares of any of the other companies mentioned. Wal-Mart and Microsoft are Inside Value recommendations. FedEx is a Stock Advisor pick. The Motley Fool has adisclosure policy.