It’s 1720 in England. A hard-working printer is busy at work. But he’s not happy…

#-ad_banner-#All around him are ordinary people starting businesses and making great sums of money by selling their stock.

What bothered him was that the businesses didn’t seem legitimate on the surface. For instance, one company’s prospectus promised, “to bring up hellfire for heating.” Another business advertised the ability, “to squeeze oil out of radishes.”

Unbelievably, these business owners sold out all their stock in a matter of days. So he asked himself how rational people could buy into such stupid business concepts. But then he made a decision.

Instead of trying to understand the rationale behind such silliness, he decided to join the club. He printed a prospectus describing a business “for carrying out an undertaking of great advantage, but nobody to know what it is.” When he opened for business the next morning, long lines of people were waiting to buy his stock.

The printer took every penny offered for the stock, and immediately boarded a boat for France. He disappeared forever.

Now, the efficient market hypothesis says that bubbles are impossible to see. In fact, former Fed Chairman Alan Greenspan actually said, “it is very difficult to identify a bubble until after the fact.” He is wrong.

Bubbles Are Visible For Miles
Take Snapchat (NYSE: SNAP) for example. It’s a ‘camera company’ that generated just over $400 million in total revenue last year. It likely won’t see profits for a decade or more, if ever.

But the company has a market cap of some $25 billion. Worse, the company’s unique selling proposition (USP) is to “empower people to express themselves.” Sounds like an undertaking where nobody knows what it is.

Now, don’t get me wrong, I have no problem investing in companies that don’t have profits. But the difference is they must have some disruptive technology to set them apart from its competitors. And empowering people to express themselves doesn’t meet that requirement.

On the other hand, I’ll jump at the chance to invest in a undervalued profitable company — especially if that company is the world’s largest maker of tools. It also happens to be the second-largest commercial electronic security company as well as the second-largest engineered fastener company.

I’m talking about Stanley Black & Decker (NYSE: SWK).

SWK’s market cap may be smaller than SNAP’s, but it has something SNAP doesn’t — about $1.1 billion of free cash flow (FCF) last year. Better yet, the company expects to increase its FCF by 7% in 2017.

The company did $11.4 billion in sales last year while employing more than 51,000 people in 50 countries. The company has manufacturing, distribution, and sales facilities in 19 U.S. states and 16 foreign countries. It has 78 facilities of 100,000 square feet or more around the globe.

SWK owns several iconic tool brands, including Stanley, Black & Decker, DeWalt, Porter-Cable, Bostitch, and others. It recently expanded its list by acquiring Sears’ Craftsman brand and Newell Brands’ Lenox and Irwin.

The Sears deal gives SWK the rights to develop, manufacture, and sell Craftsman-branded products in non-Sears owned retail, industrial, and online sales channels in the United States and abroad. At the moment, 90% of Craftsman sales are through Sears-owned channels, such as Sears and Kmart stores. But the recent announcement by Sears that the company may not survive the year might change that.

SWK expects to spend $20 million integrating Craftsman into its existing organization. It also says it will invest $80 million in capex spending, including a new U.S.-based plant to make Craftsman tools. All told, the deal should add $100 million of additional revenue each year for the next 10 years.

SWK’s Long-Term Goals
Unlike Snapchat, SWK has a plan to grow its business based on actual benchmarks. In 2015, management announced a three-year plan called ‘2018 Vision.’ The plan consists of five financial benchmarks:

1. 4% to 6% organic revenue growth, with total revenue growth enhanced by acquisitions
2. 16% operating margins by 2018 (from roughly 14% in 2015)
3. 10% to 12% earnings per share growth (including acquisitions)
4. CFROI expansion to 14% to 15%
5. Progress towards 10-plus working capital turns

How is the company doing? SWK is on its way to hitting all five benchmarks by the end of 2018.

What’s The Company Worth?
Comparable companies that dominate their industry have intrinsic values in the range of 28 to 32 times FCF. But let’s give ourselves a larger cushion to account for Stanley’s economically sensitive business by capping Stanley’s intrinsic value at 20 to 25 times FCF.

Now let’s do the math. FCF will be roughly $1.25 billion in 2017 — or about $8.28 per share. That means shares of SWK have an intrinsic value of roughly $186 per share. And since the stock is currently trading under $131 a share — it’s on sale right now for 30% off its intrinsic value.

The only real question left to answer is: Are you interested in making money on solid investments, or is empowering people to express themselves a better investment for you?

I think we know which idea the English printer would have chosen…

Risks To Consider: Like many other consumer companies, Stanley Black & Decker is sensitive to economic conditions. This means the company needs a strong housing market to continue. If the Federal Reserve raises interest rates higher or more often than anticipated, shares of SWK could suffer.

Action To Take: Buy shares of SWK up to $140. Set your stop-loss at 25%. Invest no more than 4% of your portfolio in this world-class company. Holding period is three to five years — or until the stock reaches its intrinsic value of $186 per share.

Editor’s Note: Since 1926, one collection of stocks has accounted for HALF of the S&P’s return — through every market environment imaginable. If you don’t have this group in your own portfolio, you could be missing out on the single best place to put your money this year and next. Learn which stocks can…