A Billionaire's Way Of Finding The Next Apple Or Google

by: Marc Courtenay

As stocks roared higher last Thursday and Friday, many seemed to forget that there's still a mountain of uncertainty in the week ahead.

The Federal Reserve's Open Market Committee (FOMC) will meet on Tuesday and on Wednesday they'll make their public policy statement.

The European Central Bank's (ECB) next board meeting is on Thursday August 2nd, and the investment world wants to see if they'll back the leaders of Germany, France and the ECB's President Mario Draghi's who has pledged to protect the euro with "decisive action."

If the FOMC and the ECB deliver plans and promises that back up the hope-and-hype, we may see the stock market averages move decisively higher. Any waffling or foot-dragging could lead to a sudden correction.

In the midst of all this financial turmoil are some investment opportunities that are counter-intuitive and not receiving much media attention.

The late Sir John Templeton was famous for using times of great uncertainty or severe stock market corrections to look for companies to invest in that could turn out to be the next Apple (NASDAQ:AAPL) or Google (NASDAQ:GOOG).

Legend has it that as the world was on the precipice of global war in 1939, Templeton made an investment decision that few would have the nerves of steel to undertake.

The story goes that he invested $10,000, which in today's world would be the equivalent of around $150,000, into every publicly-traded stock that was selling for $1 or less.

By the end of 1943 that $10,000 portfolio grew to over $40,000 in value, an amount equal to $600,000 today.

Templeton was apparently looking for that small handful of big winners that would emerge from that long list of companies that met his criteria.

He was renowned for trying to locate stocks with ground-breaking products and services that were emerging as standouts in meeting the challenges and needs of the turbulent times he lived through.

How quickly we've forgotten that Apple once was a struggling yet innovative corporation that at one point looked like it wouldn't survive. As you can see from the chart below going back to its genesis, Apple's prosperity wasn't always a sure thing.

Chart forApple Inc. (<a href=

Splits: Jun 16, 1987 [2:1], Jun 21, 2000 [2:1], Feb 28, 2005 [2:1]

A $10,000 investment in AAPL shares as recently as 2003 would have grown to over $200,000 by mid-2012.

So to follow Templeton's success you'd also want to build your own mutual fund and then sell it years later at a giant price premium.

Templeton, who came from humble roots, started his Wall Street career in 1937, which means his gutsy 1939 investment was when he was still learning.

He went on to create some of the world's largest and most successful international investment funds. Called by Money Magazine "arguably the greatest global stock picker of the century" (January 1999), he sold the Templeton Funds in 1992 to the Franklin Group for $440 million.

To follow in his footsteps you'll have to become a great global stock picker, or follow someone who already is.

After much study, reading of the best books and finding today's great stock pickers, examine what they've invested in and determine why.

Focus in on how the great investors pick the kinds of stocks that have the potential to grow from a market cap of $500 million to one worth $500 billion.

Going back to Templeton's 1939 decision, we might choose a similar speculation using inflation-adjusted amounts on stocks we have personally screened for valuation, earnings growth and important metrics like PEG ratio (5-year expected) and Price-to-Earnings ratios.

Recently I used a stock screener (your discount brokerage firm or online brokerage usually will have a state-of-the art stock screening program you can utilize) to build a hypothetical list of the kind of companies that Sir John might be looking for if he were with us today.

Since $1 in 1939 is the equivalent of $15 today (the buying power of a single dollar has been "creamed"), I wanted to begin by looking at companies that traded for $15 or less per share.

Then, I wanted companies whose stocks had a current PE ratio of 15 or lower, had a projected earnings-per-share (EPS) growth rate of 15% or greater this year (year-over-year).

Since EPS does correlate nicely with share price growth, I factored in a forward (1-year) growth rate of 15% or greater and a 3-to-5 year future growth rate (supported by research firms and analysts) of 15% or higher.

It also helps to look at the stock's price-to-cash flow ratio, which divides the stock price by the per-share operating cash flow.

In theory, the lower a stock's price/cash flow ratio is, the better value that stock is. The current stock market median is around 6, so I screened for companies with a ratio of 7 or lower.

The results surprised me. I found small companies like Stoneridge Inc. (NYSE:SRI), a Warren, Ohio company that designs and manufactures engineered electrical and electronic components, modules, and systems for the commercial vehicle, automotive, agricultural, motorcycle, and off-highway vehicle markets primarily in North America and Europe.

SRI has a market cap of only $175 million but their key financial metrics are very impressive and warrants further research. If the central banks of the U.S. and Europe are about to open the monetary flood gates, this is a stock that could virtually double (its 52-week high is $12.74).

Don't go buy a stock like this without looking for red flags; SRI carries a lot of debt and they have negative levered free cash flow. SRI reports it latest quarterly earnings on August 9th.

I was happy to see on my screened list one of my favorite airlines, Southwest (NYSE:LUV), perhaps the best managed of all the airlines bar none. In the second quarter of 2012 it grew its EPS (year-over-year) at a 42% clip.

LUV is trading at its book value and its revenue growth in the 2nd quarter was a respectable 12%. That represents revenue-per-share of $22, yet the share price is around $9.

This stock has the potential to grow its earnings and increase revenues to the point that the stock could comfortably trade above $12 over the next 6 months. Its forward PE ratio (1 year) is slightly above 8.

It surprised me to see an investment advisory company and private equity firm like Och-Ziff Capital Management Group (NYSE:OZM), which moved 4% higher last Friday and pays a generous dividend. OZM reports its latest quarterly earnings on August 2nd.

OZM is one of the private equity firms highlighted in a recent article that is planning on spending billions of dollars to buy foreclosed homes (using government incentive programs) and rent them out in areas where there are too few vacancies and not enough rental houses.

Sprint-Nextel (NYSE:S) wasn't on my list although I still think they have nice upside potential, but Ruth's Hospitality Group (NASDAQ:RUTH) did make the cut. Its latest quarter had a number of surprises and it caused shares to pop.

No wonder RUTH soared almost 17% on July 27th after reporting surprisingly robust traffic and increased sales. They own Ruth's Chris Steak House and Mitchell's Fish Market Chain.

Ruth's PEG ratio (5-year expected) is an undervalued 0.63 and its Price-to-Sales ratio (trailing-twelve-months) is only 0.60. According to a recent article it's even saving marriages!

Through some tweaking of the criteria I was able to add Dunkin Brands (NASDAQ:DNKN) to my list of potential big winners (especially if the stock happens to correct 10% or more from current levels).

Also watch Decker's Outdoor Corp. (NASDAQ:DECK) which hit a 52-week low last Wednesday and then shot up 10%.

The maker of footwear and accessories for outdoor activities and casual lifestyle use for men, women, and children knows how to make money and grow earnings. It also is, in my opinion, a takeover candidate and would be a nice addition to a big company like Nike (NYSE:NKE).

Two other small companies that met my "Sir John T." low-cost, good-value list are Siliconware Precision Industries Co. (NASDAQ:SPIL) which provides semiconductor packaging and testing services to semiconductor suppliers worldwide, and online technology purveyor PC Mall (MALL), whose metrics looks too cheap to believe without further research.

Another way to find the next stock market mega-success story is to invest in the most-promising, up-and-coming biotech stocks. We may have entered a time when the Biotech Index (as represented by the SPDR S&P Biotech index ETF symbol XBI) is ready to rally.

Today, biotech stocks appear to be closer to their year 2000 levels. From 1994 to the high in 2000 the Nasdaq Biotech Index rocketed over 1,000% higher. The small-to-mid tier biotechs sometimes grow by even greater percentages.

Here's a chart going back to year 2000 that shows us how the iShares NASDAQ Biotech ETF (NASDAQ:IBB) has performed.

Chart foriShares Nasdaq Biotechnology (<a href=

Some may interpret this chart to mean that biotechs have already had a good run and need to correct sharply before opportunity knocks. Perhaps so, or perhaps it's about to launch off of a new level of support.

To find the best-of-breed in any stock sector, you have to dig deep and ask counterintuitive questions. It may not be as obvious as a company with a cancer cure, or ones that invent new components for smartphones, tablets, or currently popular technology products.

Think outside the box and screen for companies that provide products and services that drive earnings and creates the kind of cash flow that leads to an exponential growth rate. Look for good leadership and ideas.

It's not easy to do and will take outstanding efforts. Spread a wide enough net and then narrow down to the best candidates you can find.

As a parting tribute, Sir John Templeton was both an amazing investor and one of the great philanthropists of our time.

Sir John spent a lifetime encouraging open-mindedness. If he hadn't sought new paths, he once said, "he would have been unable to attain so many goals."

The motto that Templeton created for his Foundation, "How little we know, how eager to learn," exemplified his philosophy in the financial markets and his deeply intuitive methods of philanthropy. He was a great example for us all, so let's keep learning and looking carefully.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.