It?s the first thing I look for when I buy a stock.
You won?t find it often, because it?s extremely rare. But when you do, you have the chance to make a significant amount of money in a short period of time.
Let me explain?If you?re a regular Investor Update reader, then you know I?m a fan of buying stock in the world?s greatest businesses. Put simply, these are companies that dominate their industries and return billions to shareholders in the form of dividends and share buybacks.
Normally, when I tell investors about these stocks, they blow me off. They dismiss them as ?slow and stodgy.? They want action. And since the stocks I?m usually recommending are large, international corporations, they think there?s no room for growth.
That couldn?t be further from the truth?
Take Intel (Nasdaq: INTC), for example. Intel is arguably one of the world?s greatest businesses. The company has an enterprise value of $110 billion and it controls nearly 80% of the PC semiconductor market. In fact, chances are you?re within arm?s reach of an Intel product right now.
You wouldn?t expect a company like Intel to offer investors much ?action.? After all, Intel already rakes in $54 billion a year in revenue. In order for Intel to grow its top line by just 5%, the company needs to generate an additional $2.7 billion in sales. That?s no easy feat.
Yet despite Intel?s massive size, when I added the stock to my Top 10 Stocks portfolio last August, the stock jumped more than 30% in just two months.
No one invests in a stock like Intel because they think they can make 30% in a matter of months. So how did one of the world?s most stable investments manage to return several years worth of gains in such a short amount of time?
The secret to generating huge returns from large, stable investments like Intel all comes down to one thing? investing in major market disconnects.
Market disconnects take place when the price of a given stock or asset class gets ?out of sync? with reality. They don?t happen often? but when they do, they give us a rare opportunity to purchase high-quality investments at rock-bottom prices.
For example, when I added Intel to my Top 10 Stocks portfolio late last year, the stock was trading at its lowest valuation of the past five years. And that was despite Intel?s soaring earnings, rising dividends, and billions in share buybacks.
Here?s the chart I showed to my Top 10 Stocks subscribers back then?
But while Intel?s stock price was getting cheaper and cheaper, the company?s financial results were heading the other direction? Up.
Take a look at Intel?s revenues and earnings over this exact same time period?
And its operating cash flow?
And look at the tremendous (and growing) amount of cash Intel has been putting back in its shareholders? pockets?
As you can see, Intel?s share price had become disconnected with the company?s underlying intrinsic value. The market had become irrational, and it wasn?t taking Intel?s soaring earnings, billions in share buybacks and its rising dividend into consideration.
It didn?t take long for the market to realize its mistake. Once investors realized that Intel?s share price had gotten out of sync with the company?s underlying fundamentals, they quickly bought up the shares, pushing the stock price up 30% in a matter of months.
That?s the power of investing in market disconnects. When you find them, they provide you with the greatest opportunity to grow your wealth quickly, while also investing in the world?s most dominant businesses.
Action to Take ?> Intel?s stock price has risen sharply since I first recommended it to my subscribers over a year ago. But even after the increase, Intel?s shares are still only a few points above the level they were back in the spring of 2010, when earnings per share were just $1.09 ? 120% lower than they are today. So I still think Intel has a long way to run.
But more importantly, stocks like Intel show you it?s possible to earn big gains in a short period of time. All you have to do is carefully track some of the world?s greatest businesses, and then wait for a situation where the value of a security just doesn?t match up with the underlying facts.
I recently found another big disconnect in a fund that owns 73 utility companies from developed markets around the world. The companies held by the fund aren?t risky growth stocks and have been steadily returning cash to investors for years. But, remarkably, this fund is trading lower than it did during the height of the 2008 recession. It?s a definite market disconnect.
The fund was my September pick for my premium newsletter Top 10 Stocks. To learn more about the newsletter, click here.
? Paul TracySource: StreetAuthority
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