America is talking about Affiliated Managers Group !
OK, not really. In fact, there's a good chance you've never even heard of this company. Yet its value more than tripled after Tom Gardner recommended it in Motley Fool Stock Advisor in September 2002. (He subsequently issued a sell recommendation -- more on that later.) What made this stock a success? Three main reasons, a couple of which are surprising.
1. Obscure company
Obscure, and rather boring, AMG is a holding company of mid-sized money-management firms from around the country. These businesses, which invest money in stocks for other people, include Essex Investment Management, Friess Associates, and Tweedy, Browne.
Most great success stories were unknown in the beginning. Even Wal-Mart garnered no excitement in its early days. But these under-the-radar companies can offer individual investors bargain prices.
2. Efficiently run
AMG has done a great job of assembling high-quality asset management firms and leaving them largely autonomous. Yet all the affiliates benefit from lower administrative costs, access to better technology, new product development, and diversified approaches across the company. In addition, incentives are tied to the performance of cash earnings per share. Haphazard or indifferent management doesn't cut it at AMG, and the result is a lean, efficient, and well-operated machine.
3. Bad industry
When Tom uncovered this solid business, it had been beaten down nearly 40% from its 52-week high. Of course, we were smack-dab in the middle of one of the worst bear markets in years, and the entire asset-management industry was hurting. Who cared about these companies anymore?
But because of top-notch efficient management, AMG was not only able to weather whatever the market threw at it, but it also was poised to reap big benefits when the market eventually turned around. The result: a quality company available at a bargain price.
The next AMG?
There are many other factors to consider when sizing up a potential investment. But if you can identify a company that's (1) obscure, (2) efficient, and (3) in an out-of-favor industry -- well, that's a beautiful thing. You may have found a stock that's beaten down well below its fair value and is ready to break out when the industry recovers.
To illustrate, I selected a few industries that have hit the skids recently, and screened for companies within those industries that had net margins and return on assets significantly better than industry averages. Here's a short list of such companies that now trade well below their 52-week highs:
Company
Industry
Recent Price
52-Week High
Las Vegas Sands (NYSE: LVS)
Casinos/gaming
$7.37
$59.17
MGM Mirage (NYSE: MGM)
Casinos/gaming
$6.63
$39.50
JA Solar Holdings (Nasdaq: JASO)
Semiconductors
$4.26
$20.18
Boyd Gaming (NYSE: BYD)
Casinos/gaming
$8.05 Continued... |