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
tripledafter Tom Gardner recommended it in
Motley Fool Stock Advisor
in September 2002. (He eventually issued a sell
recommendation, though -- 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 midsized 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 some 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, 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, anyway?
But because of top-notch efficient management, AMG was not
only able to weather whatever the market threw at it, but it
was also poised to reap big benefits when the
market eventually turned around. It was a quality company,
available at a bargain price.
The next AMG?
There are 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 ready to break out when the industry recovers.
To illustrate, I selected a few industries that have hit
the skids in the past year (not a hard task), and I 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, all of which
now trade well below their 52-week highs:
Company
Industry
Recent Price
52-Week High
Titanium Metals (NYSE: TIE)
Metal mining
$8.60
$11.52
MetroPCS (NYSE: PCS)
Comm. services
$6.23
$18.98
Valero Energy (NYSE: VLO)
Oil & Gas
$18.10
$26.20
Vaalco Energy (NYSE: EGY)
Oil & Gas
$4.26
$8.54 Continued... |