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Even Better Than the Next Big Thing

By Chuck Saletta - Updated Nov 11, 2016 at 4:48PM

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Tremendous bargains hide out in yesterday's news.

The financial media -- this website included -- is littered with stories about finding the next great investment. They often have the same tagline: "If only you had found this tremendous company when it was just getting started, your small investment back then could have made you a multimillionaire by now."

These types of articles often draw from the same pool of companies with spectacular histories: Starbucks (NASDAQ:SBUX), Wal-Mart (NYSE:WMT), and Microsoft (NASDAQ:MSFT). The stories always point out how their world-changing greatness was evident since their beginnings, and if you had only known how to find it back then, you would already be rich.

Reality bites
What's almost never pointed out, however, is that for every Wal-Mart, there are a handful of stories like Winn-Dixie or Phar-Mor, whose bankruptcies wiped out their owners' equity.

Likewise, for every Starbucks that profitably revolutionizes the food service experience, there are bankruptcies like Bennigan's, Big Boy, and Rainforest Cafe.

And who could forget the dot-com bubble implosion that took down so many technology companies vying to replicate Microsoft's financial success? Investors who chose the right companies too late haven't exactly been rewarded with stellar returns for the risks they've taken:

Company

Date of All-Time
High Close

All-Time
High Close

Recent
Price

Fall From Grace

Nortel Networks (NYSE:NT)

7/25/2000

$867.22

$0.30

(99%)

MicroStrategy (NASDAQ:MSTR)

3/10/2000

$3,130.00

$36.34

(99%)

Sun Microsystems (NASDAQ:JAVA)

9/1/2000

$257.26

$4.28

(98%)

Cisco Systems (NASDAQ:CSCO)

3/27/2000

$80.06

$16.91

(79%)

The trouble with the future
If you're trying to successfully invest in the next big thing, you've got to:

  • Figure out what the next big thing will be,
  • Buy the exact company or companies that will be successful in it before the rest of the market realizes who they are, and
  • Sell those same companies before their growth slows and the folks who've come later to party start dumping their shares in droves.

If you could do all that reliably and repeatedly -- well, I hear Warren Buffett is looking for a successor.

Your real shot at success
Fortunately, you don't need to find the next Wal-Mart, Starbucks, and Microsoft ahead of their initial ascents in order to profit as an investor. In fact, you could do just fine by buying the existing ones, after they've been abandoned.

And investors are abandoning stocks these days -- sometimes with good reason, but often indiscriminately. Check out what's recently happened to those three stocks:

Company

5-Year Average P/E

Current P/E

Starbucks

39.9

22.9

Wal-Mart

19.1

16.1

Microsoft

23.5

10.6

Data from Capital IQ.

It's during times of panic like these when companies with proven strength, proven business models, and proven profits become legitimately cheap.

A truly great company remains a great company even after its stock price tanks. With so many stocks beaten down, now is the time for you to pick out the very best-of-breed firms. When you can buy an exceptionally strong company at a bargain-basement stock price, it's a recipe for tremendous returns, as the records of master investors like Warren Buffett, Chuck Akre, Marty Whitman, and so many others have proven.

If you're looking for some more investing ideas in proven companies at discounted prices, our Inside Value service can help. We're currently offering a free 30-day trial. Click here for more information.

At the time of publication, Fool contributor and Inside Value team member Chuck Saletta owned shares of Microsoft. Microsoft, Wal-Mart, and Starbucks are all Inside Value selections. Starbucks is also a Motley Fool Stock Advisor selection. The Fool owns shares of Starbucks and has a disclosure policy that's much timelier than yesterday's news.

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Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$129.14 (0.21%) $0.27
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$289.16 (2.43%) $6.86
Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$86.49 (1.95%) $1.65
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
CSCO
$46.02 (2.45%) $1.10
MicroStrategy Incorporated Stock Quote
MicroStrategy Incorporated
MSTR
$335.80 (5.14%) $16.42

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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