An Easy Way to Make 36% a Year in Stocks
By Graham Summers
June 13, 2007

It's one the easiest ways for a lazy man to get rich in stocks...

Because of SEC regulations, institutional money managers such as Warren Buffet, George Soros, and the like have to report the stocks they own, every quarter. So rather than dig through piles of research and financial statements, investors can simply buy the same stocks as the greatest investors in the world, sit back, and enjoy the ride.

For instance, back in 2003, Buffett's Berkshire Hathaway famously bought a large position in Chinese oil producer, PetroChina (PTR). If you'd taken the stock tip back then, you'd be up over 400%.

The problem is, if you follow a long-term investor like Buffett, it might be years before you see a sizable return. True, if you'd bought Coke (KO) after Buffett did, you would have made a fortune, but it would have taken 10 years to do it.

However, if you follow an activist investor... you're likely to see fireworks pretty soon.

Activist investors buy up large stakes in companies and use their holdings to influence the company's management and improve profitability. The most famous activist investor is Carl Icahn. But a man named Eddie Lampert wears the crown of highest returns.

Lampert started his own hedge fund, ESL Investments, with $28 million in 1988. Since that time, he's shown investors average annual returns of 29%, beating even Warren Buffett for the same time period.

Today, ESL includes most of Lampert's money as well as private accounts for Hollywood producer David Geffen, Dell founder Michael Dell, and the Tisch family.

A return of 29% a year for 18 years will make you a lot of money. Geffen claims that had he not removed part of his initial $200 million investment for diversification, he'd now be sitting on more than $9 billion.

Lampert's favorite technique is to buy a large stake in a company and vote himself onto its board. He then pushes the company's management to cut costs and improve its margins with the goal of generating as much cash as possible.

Just consider what he did with automotive retailer AutoZone (NYSE: AZO).

Lampert is a value investor obsessed with cutting costs. Sales at this company only grew 38% from 1999, when he joined the board, to 2005. But both operating and net margins have roughly doubled over the same time period.

On top of this, return on equity jumped from the already impressive double-digit range to the astounding triple digits: 235% in 2005. From 1999 to 2005, this company showed investors an average return on equity of 60%.

Aside from increasing AZO's profitability, Lampert drastically increased its returns to investors. He halved the company's shares outstanding, creating an annual "synthetic" yield of 6%. In other words, if you bought the year that Lampert joined AZO's board, your shares became 6% more valuable every year.

You'd also have made more than five times your money.

And lest you think you need to buy immediately after an activist investor first takes a stake in a company, consider the following.

I recommended AZO to Inside Strategist subscribers in March 2006, five months after Lampert bought an additional $53 million worth of AZO stock, bringing his and ESL's stake in this company to roughly 28% of the shares outstanding.

Today, one year later, we're up 36%.

Recently, Lampert has bought shares in Citigroup (C), Motorola (MOT), and Clear Channel Communications (CCU). His positions in these investments are worth $780 million, $16 million, and $30 million respectively.

I doubt it will be long before he boosts each of these companies' profitability and share prices.

Good trading,

Graham