Add Easy "Muscle" to Your Returns

Former Fidelity Magellan Fund manager Peter Lynch used to tell investors to "buy what you know."

It's good advice.

Granted, you may not be able to do that with every investment you make.

But if you look for as many opportunities as possible to employ this philosophy, chances are you'll end up adding some real muscle to your portfolio.

Here's why I was thinking about Lynch, who shared his investing philosophies with millions of individual investors in such runaway best-sellers as One Up on Wall Street...

This Great Profit Opportunity Was a Minute Away

I was thinking about this late one night earlier this week when I was working on one of my little "projects" at home. The house was very still. My son Joey and wife Robin were in their beds up the hall - sound asleep - and our border collie Sterling was sprawled nearby... sort of half-awake.

My pocket knife - one of those nice little jobs with a spring-assist opening - had lost some of that "spring." My plan was to clean it up and lubricate the spring action to cut down the friction.

I first thought about using silicon spray.

But then I knew the answer was WD-40.

For a lifelong "motorhead" like me, WD-40 is the mechanical version of a miracle "cure-all"... and can help fix just about anything. It kind of reminds me of the Gus Portokalos character (played by Michael Constantine) in "My Big Fat Greek Wedding," who believed that Windex could fix anything - including sore joints.

Anyway, I shot some WD-40 inside my knife and "worked" the action back and forth a few times, and my spring-assist pocket knife has a new lease on life.

WD-40 is a great product. It's a great brand. And we believe it can be a great investment - especially for long-term investors looking to navigate a market as squirrely as this one.

Heck, there's even a WD-40 Fan Club.

In short, it's a stock that you should look to buy and keep for a long time.

The One Cult You'd Join

The San Diego-based WD-40 Co. (Nasdaq: WDFC) is a $1 billion market value company whose motto is: "We live under the sink, in the garage, and in the toolboxes of the world." (True to form, I found the can of WD-40 spray I used under our kitchen sink.)

It does business in 188 countries around the world and, in the fiscal year ended in August 2013, had $368.55 million in sales and $38.9 million in profit - a decent profit margin of 11%.

WD-40 goes all the way back to 1953, when a staff of three in a small lab at a fledgling firm called Rocket Chemical Co. set out to create a line of rust-prevention solvents and degreasers for the aerospace industry.

It took researchers 40 tries to get the water-displacing formula worked out.

But it was a powerful discovery: The original secret formula for WD-40 - which stands for "Water Displacement perfected on the 40th try" - is still in use today.

Convair, an aerospace contractor, first used WD-40 to protect the outer skin of the Atlas missile from rust and corrosion. The product was so effective that some Convair workers sneaked cans of WD-40 out of the plant to use at home.

Rocket Chemical founder Norm Larsen decided to put WD-40 in aerosol cans, correctly guessing that consumers might also find home uses for the lubricant. The product showed up on San Diego store shelves in 1958.

WD-40 was still Rocket Chemical's only product 11 years later, when the name was changed to the WD-40 Co. It went public in 1973, and its shares soared 61% on their debut.

When the company celebrated its 40th anniversary in 1993, WD-40 also broke the $100-million-in-revenue mark. Sales exceeded a million cans a week.

A survey found that WD-40 - at the time still the company's only product - was used by 81% of professionals at work.

Even more dramatic: The product was present in four of every five U.S. households.

In other words, 80% of America owned this product.

And that was 21 years ago, when this country had a population of 257 million folks.

Today we're talking about 320 million.

That doesn't include all the economic growth we've seen in many of the 187 other countries WD-40 sells to.

Those statistics underscore the thing I most like about this company: It makes a "cult" product. There are thousands of known uses for WD-40, most of which are pretty well known: silencing squeaky hinges, protecting tools and parts from rust, lubricating joints, and even removing road tar from a car's paint job.

But there are also some truly zany stories, which is why this is a "cult" product...

For instance, there was the bus driver in Asia who used WD-40 to remove a python snake that had coiled itself around the undercarriage of his vehicle. And there were the police officers who used the lubricant to extract a burglar who'd become trapped - naked - in an air-conditioning vent.

The variety and amazing stories surrounding the uses of WD-40 have landed it in a whole series of books - from The WD-40 Book to WD-40 for the Soul: The Guide to Fixing Everything.

Eugene Fram, an international market expert and a professor emeritus for the Rochester Institute of Technology Saunders College of Business, says that WD-40 is one of those rare, iconic products that everyone knows and has good feelings for.

And that's a big deal.

"WD-40 - like Coca-Cola, and both based on trade secrets - has carefully nurtured its brand image over a long time period," Dr. Fram told me this week. "Even as the firm has added other brands, such as Lava Soap, it has kept the cult-like image for customers who are brand ambassadors. Unlike Coca-Cola, the firm didn't try to introduce a new or advanced WD-40 product. Its niche has remained loyal to the product and evidently has created customers for it among a younger generation."

Dr. Fram makes a great point - which is another reason to like the stock: The company is no longer a "one-trick pony." In 1995, WD-40 Co. acquired the equally iconic 3-IN-ONE Oil from Reckitt & Colman. That 100-year-old lubricant brand made for a terrific partner for WD-40.

Four years later, WD-40 added another "fortress brand" product when it acquired Lava Soap from Block Drug Co. Inc. Lava is the best-known brand of heavy-duty hand cleaner in the U.S. market.

And a year later, in 2000, WD-40 bought Solvol, the leading heavy-duty hand cleaner in Australia.

There have been other acquisitions, too, but you get the idea. All the moves have solidified the company's position in the consumer market, while giving it a deeper penetration into the professional market.

In short, WD-40 is the kind of stock we're always looking to find - and hold for a long, long time.

Cashing In

The company spends almost nothing on research and development, has a great net-profit margin (for a manufacturer) and is seeing revenue and profit growth.

The stock has been knocked down a bit after a slightly "light" earnings report back in July, but that's just giving us a lower entry point for a stock that you should be looking to hold for a long time to come. And here's a "bonus": The stock carries a decent dividend yield of about 2% - pretty good for a small-cap play.

This well-run company will keep adding new products and will seek to "extend its brand" by finding new ways to package and market WD-40. The core product is iconic and stands out on store shelves. I mean, how many times have you said "Get me some WD-40" - as opposed to "Get me some lubricant so I can make this door hinge stop squeaking."

You get my point.

The stock was trading at $67.71 late yesterday, up about 1.7% after an unexpected mention on CNBC. But it's still trading in the middle of its 52-week range of $60.76 to $79.31.

Analysts have a consensus target of $80 on WD-40. But there's a high-water estimate of $91 - about 14% above its recent trading price.

Over time, consistent gains of this magnitude - bolstered by a 2% payout - can really add up. Indeed, WD-40 shares have zoomed 131% over the last five years.

We'll keep searching for the big winners - the wireless plays, biotechs, and special-situation plays that have the chance of doubling your money in a short stretch. But it's also crucial to have foundational plays like WD-40 among your holdings.

Because you'll want to own this for a long time to come - five years or longer - you'd usually not want to employ a "trailing stop."

But in a wobbly market like this one - last Wednesday, Investor's Business Daily said the Nasdaq Composite Index had entered "correction" territory - you still need to manage your risk. So we suggest that you buy two-thirds of your intended holding in WD-40 right now, at market. That final third lets you "keep your powder dry" and average down a bit in case of a correction.

Consider breaking that final "third" into two equal tranches - one 20% below your purchase price and the second 35% below. And don't "force the fill." If the market doesn't correct, and WD-40 shares don't fall that far, don't feel the need to purchase those other tranches: You still have a nice position to work with.

In our view, WD-40 is the kind of stock that will let you squeeze out of any tight spots we get into, and over the long haul will help you achieve the financial independence we all seek.

The only person who might not agree is that burglar from the air-conditioning duct.

Up Next from Bill...

Fed Chairman Janet Yellen may not be the Devil... But she sure has made a Deadly Deal with one. A deal that's about to create one of the biggest market crashes in history. Everyone will get crushed. Everyone, that is, except you - if you follow Bill Patalon's plan. With this plan, you can give the Devil his due... and come out without a scratch. You can also make a fortune to boot. Go here and you'll understand perfectly.

About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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