Editor's note: We're likely in the final innings of one of the longest bull markets ever...

As a result, it's a challenge to find value stocks right now. But it isn't impossible...

Extreme Value editor Dan Ferris has found an anomaly in the market. It's a company that "absolutely" meets all five financial clues that he looks for in high-quality businesses.

Today, in the conclusion of our two-part exclusive interview, Dan explains why he loves this company so much... why its business model is so attractive... what he looks for in a management team... and why a lot of people are making a big mistake right now...

The First 20-Bagger in Stansberry Research History?

An interview with Dan Ferris, editor, Extreme Value

Sam Latter: You've called one stock in the Extreme Value portfolio your "No. 1 recommendation" – and have said it could make investors 20 times their money. Does it check off the five financial clues?

Dan Ferris: This company is my absolute highest-conviction recommendation. And it absolutely checks off all five financial clues.

It generates tens of millions of dollars in free cash flow. The margins on the biggest part of its business have been consistent for decades. The balance sheet is as good as it gets, lots of cash and no debt. That could change soon, with recent activity. But I think leadership will manage it brilliantly as it has done over the years. This stock is yielding around 4% right now and the dividend isn't going away. Management will buy back shares when the time is right.

And the fifth clue – the company's return on equity – is very good, with the potential to get ridiculously good over the next few years. It's around 20%-30% right now, but the business is at a cyclical low. It wouldn't surprise me if in the next few years, it was 100% or more. It's great right now, and it's going to get much, much better.

Plus, I know the people in the business and have been talking with them for years. I don't know anything the public doesn't know, but I've enjoyed a good relationship with these folks and I have a great understanding of the business.

Sam: Without giving too much away, this company employs one of our favorite business models. It has its hand in royalties. Why are royalties so attractive and profitable?

Dan: This isn't a royalty company, but it does have a royalty-like business. Royalties are good for all kinds of reasons, one of which is that the royalty is on the property and not on the company. If you have a royalty on a producing mine and the company that owns it goes through bankruptcy, you still make money as long as the mine is producing. A royalty on a mine that produces for decades can be a wonderful asset. Another company in the Extreme Value portfolio owns royalties on mines that have hundreds of years of resources left in them.

Sam: It sounds like your No. 1 recommendation also has one of the strongest management teams you've come across. Why is a strong management team so important, and what are you looking for in a company's management?

Dan: Legendary investors like Warren Buffett and Peter Lynch have long said that you want a business that's so good a monkey can run it.

What you really want, of course, is not for a monkey to run it. You want a great management team in charge. We've found two management teams in particular that are absolutely world-class. Strong management is important for these two businesses because they're in an extremely cyclical industry.

The industry goes up and down. Generally speaking, the overwhelming majority of management teams behave poorly through the full cycle. They'll purchase a lot of assets at the top of the cycle and have to sell those assets at the bottom. They're forced to do that to try and stay alive. They need to generate cash, so they wind up having to sell assets at the exact moment they should be buying them. Well, the two management teams I'm talking about are the ones buying them. They sell on the upswing and buy after the downswing has created good prices in the assets they're looking for.

I'll give an example... Back in 2009, management at one of the companies I'm talking about sat down and made a list of 10 or 12 assets it wanted to own. They didn't pull the trigger on one asset on that list for five years. They waited five years for prices to fall. That's the kind of discipline you want. You want somebody who refuses to buy unless the price is right. It's rare. Investors want short-term, instant gratification.

It takes a long time to figure these situations out. It actually took me a few years. I knew about both companies and had personally owned them both years before I had to sell them to recommend them to my Extreme Value subscribers. Again, this is a long-term undertaking and watching a good management team behave well over a long period of time. It's educational for investors.

Sam: You've been incredibly generous with your time. Is there anything else you wanted to add before we let you go?

Dan: Yeah, one thing... Right now, stocks are expensive. Historically speaking, over time, when the price-to-sales ratio on the S&P 500 Index is high, the subsequent 10-year returns are low.

And right now, looking at my Bloomberg screen, it says that the price-to-sales ratio of the S&P 500 is 2.13. The all-time high was 2.36 in January 2018. And at the previous peak in early 2000, the ratio was 2.35. Stocks are close to their most expensive valuation in history by that measure, and other measures are almost at new highs right now. So it's a dangerous time to run around buying lots of stocks. They're expensive.

The big mistake everyone is making today is what famed investor Howard Marks has called "a lack of imagination." In the late 1990s, no one could imagine that networking giant Cisco (CSCO) was a terrible investment at the prices it was trading at. But it turns out that if you bought Cisco at the peak in early 2000 – and let's face it, lots of people bought it at the peak – you still haven't broken even, almost 20 years later.

Sam: It's all about the price you pay, right?

Dan: Exactly. I was reading through Maggie Mahar's book Bull! which everyone should be reading right now. It talked about institutional investor David Tice. He studied all the mutual funds of the late 1990s and realized that 10 out of 10 funds owned Cisco. Other stocks like software company Microsoft (MSFT) and industrial conglomerate General Electric (GE) were owned in eight or nine out of 10 funds. Almost everybody owned them and thought they were no-brainers.

This has happened over and over again. It happened in the late 1960s with the "Nifty Fifty" companies like Polaroid, Avon, and Xerox. They all fell 70%, 80%, 90% in the bear market that bottomed out in 1974. It happened again in the dot-com boom. People thought Cisco and Microsoft were no-brainers. Investors who bought Microsoft at the peak only broke even maybe a couple of years ago.

Right now, nobody can imagine e-commerce giant Amazon (AMZN) or search engine firm Alphabet (GOOGL) getting cut in half. Even iPhone maker Apple (AAPL). Nobody can imagine it falling 50% or more. That's a huge source of vulnerability for a lot of people today.

Sam: I'm still waiting for my Pets.com investment to work out.

Dan: So you understand what I'm saying.

Sam: Yeah. Before I let you go, you recently published the March issue of Extreme Value. In it, you recommended a company that you call a "classic 'five clues' stock"... Can you give us a little teaser about why you're excited about this company?

Dan: Absolutely. Now, this company isn't the perfect "five clues" stock. But it ranks among the best-looking of the cyclical businesses we've ever seen.

It has been an excellent free cash flow generator for more than a decade. It's gushing more than ever right now, and we expect that to continue into next year. It has one of the least capital-intensive business models anywhere in its industry.

The company's gross profit margins have moved from around 55% to 64% over the past decade, reflecting its strengthening competitive position. The margins have remained steady across a full cycle within this company's industry.

With 2018 earnings at more than 13 times the company's interest expense, it's debt-service burden is easily manageable. It currently has its highest level of debt coverage since 2014.

Management currently has a $2 billion share-repurchase authorization, enough to buy back about 11% of outstanding shares at recent prices. And with the equity trading cheaply today, repurchases at current levels will likely create value for remaining shareholders.

Finally, the company has always had a consistently high return on equity. And we expect the business to continue generating a high return on equity as long as it maintains its dominance.

Last year, this company did $4 billion in revenue. And as the leading innovator in its space, it's not slowing down... It introduces new products at double the pace of its nearest competitor.

By any measure, we're talking about an exceptional business. But the company has endured some bad news in the recent past that has depressed its valuation. As a result, we believe this is a tremendous opportunity to buy as investors continue to express some doubts.

The opportunity for a market-beating return will dissipate as uncertainty diminishes, but right now, I believe this stock has 50% upside over the next year.

Sam: Sounds like you've found another potential winner for your Extreme Value subscribers. Thanks for taking the time to speak with us today.

Dan: It's been my pleasure, Sam, as always. Anytime.

Editor's note: "If I had to pick a stock to put every penny of my personal wealth in, this would be it," Dan says. He calls it his No. 1 recommendation in 20-plus years in the investment-newsletter business... And though it's currently trading just pennies above his maximum "buy" price, Dan believes it could become the first 20-bagger in Stansberry Research history – turning every $5,000 invested into more than $100,000. Get the details here.