This article was originally written by Bill Mann, but has been updated by our Foolish staff. The words below reflect Bill's tone.
Tom Gardner invited me to provide a stock idea for the Motley Fool Hidden Gems small-cap newsletter in October 2003. Given how much I love "special situations" -- companies that are involved in some sort of restructuring, turnaround, or other conditions that provide opportunity for investors -- I focused on two such opportunities: commercial oven maker Middleby
Both had undergone recent changes to address problems with their businesses, causing investors to flee their stocks. Middleby was refocusing its business on ovens, and Coinstar was responding to the loss of Safeway
Short-term news, long-term world
Special-situations investing works because so many of our fellow investors tend to focus on short-term problems, without considering that the overwhelming majority of them are fixable. The world's largest restaurant company, McDonald's
That's what I call a "fat pitch." If you ignore the headlines, and ignore Wall Street's sell-what's-hot ethos, you'll find opportunities like this one. The end result for McDonald's has been a 350% rise in its share price in less than four years, and a recently generated $180 million in cash from its spinoff of a portion of Chipotle Mexican Grill
Special and boring
Think about that for a moment. We're not talking about the greatest laser technology to come down the pike. We're talking about hamburgers and burritos, and big, big gains for investors who stayed the course.
What other special situations exist? One of the great tricks to special-situation investing involves seeking out companies that are being penalized for problems that affect their entire industry, though the company itself may have a perfectly reasonable grip on these issues. Continental Airlines
The Foolish bottom line
Do special situations exist today? You bet. In fact, I highlight one such opportunity in an issue of Hidden Gems. You might also want to look at companies like Red Robin Gourmet Burgers
I can't say that I agree.
This article was originally published on Feb. 27, 2006. Check out our entire series on special-situations investing.
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Mike Kasprzyk updated this article, which was originally written by Bill Mann. Mike does not own any of the companies mentioned. Middleby, Coinstar, and Chipotle are all Hidden Gems recommendations. Chipotle is also a Rule Breakers recommendation. The Fool's disclosure policy remains strict.