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by David Sterman

The super-rich aren't like you and me. They can't invest a little here and a little there and hope to make serious returns. They have to bet big on particular investments to really get a payoff. And with such big bets to make, you can be sure they do lots of homework and then vet their ideas with the investment world's leading thinkers.

So when Bill Gates -- one of the country's wealthiest citizens -- makes repeated investments in an automotive retailer, my ears perk up. He's bought three large blocks of stock in the past 10 days, even as shares power higher to new 52-week highs. Is he crazy, or does he know something the rest of us don't?

The limits on insiders

Bill Gates already owns more than 10% of automotive retailer AutoNation (NYSE: AN), well above the 5% threshold that qualifies him as an insider (in this case he's deemed a "beneficial owner"). And like all insiders, he can only buy and sell stock during certain trading windows, such as after an earnings release. His latest moves came after the company, which operates 250 car dealerships in 15 states, reported third quarter results. In three separate filings, Gates acquired an additional 159,000 shares at an average price of $24, pushing his total ownership to 12 million shares -- worth $288 million.

AutoNation's quarterly results were a mixed bag, highlighted by an impressive +4% jump in same store-sales, but offset by higher operating expenses that led the auto retailer to slightly miss profit forecasts. Gates likely figured that the sales trends were the most important metric to watch, and not quarter-to-quarter expense trends. That's what sets big picture investors like him apart from the analyst crowd. (Sure enough, AutoNation's October new car sales figures, which were released last Thursday, were up a healthy +15% from a year ago, slightly exceeding broader industry trends).

Analysts simply look at current trends and derive a target price. For example, UBS rates the shares a "sell" with a $20 price target (down from the current $26 share price), believing the stock is only worth about 13 times their projected 2011 EPS forecast of $1.55. Analysts at Buckingham Research predict shares will fall all the way to $18, citing tepid profit margins. If you looked at AutoNation's recent growth rates and profit margins, that price target makes sense.

But that's not a wise way to look at this stock. Instead, longer-term focused investors note that the U.S. auto and truck market has shrunk from 17 million vehicles in 2006 and 2007 to around 11 or 12 million these days. In the next few years, though, industry volume is likely to rebound back to the 13 or 14 million mark. And if that happens, Auto Nation's per share profits are likely to surpass $2 or even $2.50 a share. If the industry sells 15 or 16 million vehicles by 2014 or 2015, then the EPS math changes to $3 or $3.50. And that's likely how Bill Gates views this story. With potential earnings power like that, this $26 stock could easily approach $35 or $40, representing nearly +50% upside.

This increasingly large bet from Bill Gates highlights the difference you should notice between the near-term analysts and long-term investors. While analysts incrementally raise and lower their estimates and target prices, big picture investors like Bill Gates can afford to look much farther out. And in this instance, he sees a pretty sunny view for AutoNation, and you might do well to follow his lead.

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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

Source: Why Bill Gates Can't Get Enough of Auto Nation