COMMENT
The Next Four-Bagger

I'm always hunting for shares that have the potential for substantial returns to recommend to Motley Fool Value Investor members. One type of investment that excites me is what I call a value-to-growth play -- basically a low-growth or out-of-favour firm that suddenly ignites its earnings and experiences a rapid and sizeable market re-rating.

Stanley Gibbons (LSE: SGI), the famous stamp dealer, is a textbook value-to-growth example. I highlighted the shares in July 2003 at 26.75p. Last night they closed at 95.5p. Including 8.5p paid out in dividends, anybody smart enough to follow my Stanley Gibbons suggestion would now be sitting on a near four-bagger.

Let me explain what I liked about Stanley Gibbons.

Nineteen months ago, the company was an overlooked small-cap. It had been spun off from a troubled parent and its financial record was hazy. However, the liberated management was set on revitalising the famous name and brokers were then expecting the company to increase its earnings by 70% in both 2003 and 2004 -- rosy by anybody's standards.

But supporting the City projections were upbeat boardroom comments and a booming stamp market. At the time, the prospective price to earnings (P/E) ratio was low (just 8) and importantly, the shares were also backed by a solid balance sheet.

Net tangible assets then amounted to 26p per share, giving an attractive price to book of 1. Indeed, the accounts included a net cash balance and a stake in a US dotcom, which last year was in fact sold for ten times its book value! Anyway, the share price left the Stanley Gibbons brand, reputation and earnings capacity essentially in for free. However you looked at it, Stanley Gibbons was clearly a value share.

Subsequent annual and interim figures from Stanley Gibbons go a long way to explain the massive share price leap. Earnings were up an astounding 84% during both 2003 and the first half of 2004, aided somewhat by stamp prices improving over 15% during that time. Positive talk concerning foreign collectors, new catalogues and Internet dealing currently support the prospect of a 50% profit increase for 2004 as a whole.

Sadly, Stanley Gibbon shares no longer offer the blindingly obvious value they once did. Despite the bullish earnings expectations, the forward P/E is now 18 while the last results indicate a price to book of about 3. The shares have moved from a value rating to a growth rating – handsomely rewarding canny investors who took the plunge in mid-2003.

All this shows the potential of value-to-growth opportunities. And I'm sure there are more out there in today's market. I'm always trawling for cheap companies whose profits look set to sky-rocket and have the potential to become the next Stanley Gibbons -- the next four-bagger. When the right opportunity occurs, readers of the Motley Fool's Value Investor newsletter can be sure they'll get the details first. A free, no-obligation trial of the Motley Fool's Value Investor newsletter is available here.

Maynard recommends a share every month for the Motley Fool's Value Investor newsletter.