This Is by Far the Safest Way to Double Your Money Every 24 Months
by Dan Ferris
December 02, 2006

After 15 years of doing my own investment research, I’ve figured out the right way to pick stocks.

I’m not kidding. If this is all you know, you can get rich in stocks, and in far less time than you’d think. Here’s what you look for: Overcapitalized companies with good long-term business prospects. Don’t worry... overcapitalized is something really easy to understand.

Overcapitalized just means loaded with extra assets.

A textbook case is our recommendation of KHD Humboldt Wedag (KHDH) in the pages of Extreme Value. Since our initial recommendation three years ago, it’s up more than 200%, having produced a pretax compounding return in excess of 42% per year. You double your money every 24 months at that rate. The fact that this stock is up isn’t just 20/20 hindsight.

You see, we recommended it three times. We knew we had a big, safe winner on our hands, and we let our subscribers know it.

We recommended KHDH for the first time in August 2003. It was called MFC Bancorp (MXBIF) back then. It was right around $12 per share.

The company was loaded with a diverse array of valuable hard assets, including a Ugandan cobalt refinery with feedstock in inventory; several developable acres in Gig Harbor, Washington; a royalty interest in the Wabash iron ore mine in Nova Scotia; and loads of cash on its balance sheet.

All that was in addition to its trading operations and merchant banking business. I said MFC was a buy up to $15.50 per share. Anyone could have easily discovered that the shares were worth more than $23 each.

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The stock made steady gains for a year and a half. By February 2005, it was around $18, and it had spun off the Ugandan cobalt refinery (worth more than $4/share). At that time, I raised my valuation to $46.50, and said we wouldn’t sell it unless the valuation got stupidly high.

Then, MFC Bancorp underwent a major transformation. It changed its name to KHD Humboldt Wedag. It spun off its banking unit and said it would focus on the business of engineering and supply for cement, coal, and minerals processing.

I took a third look at KHDH in June of this year. It still had way too much cash on its balance sheet, and was still holding onto one of its old banking subsidiaries. The stock was then at $27, and it had nearly $15 per share in cash. That’s overcapitalized. I found $27 per share in earnings power, so I knew the whole thing was still worth $42 or so. I raised my buy limit to $29 per share.

Just a few days ago, KHD announced that it had bought back 5.2% of its shares and sold its last remaining banking subsidiary. It shot up nearly 11%, to close at $41 per share. But I’m not quite ready to sell.

Why not? As I wrote in June, “I think there’s a reasonable chance you’ll double your money on KHDH over the next three years.”

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Every step of the way, the company has converted its large asset base to its highest value for shareholders. It bought and sold assets, spun off whole businesses to shareholders, and repurchased shares. Now it’s adding a little bit of debt to the balance sheet in the form of a line of credit for $267 million.

The process of converting extra assets to shareholder value isn’t quite complete at KHD. So we’ll continue to hold onto the stock… and continue to look for more stocks just like it. Of the 26 open positions in the Extreme Value Model Portfolio, 17 of them have announced a major resource conversion over the last year or so.

Extra assets. Good long-term outlook. That’s how we do it, and, as you can see from this example, it works.

Regards, Dan Ferris