The Way to Prosperity

The Oracle of Omaha, Warren Buffett, turned an initial bankroll of $10,000 into a multibillion-dollar conglomerate. Shelby Davis built $50,000 into a $900 million fortune. These inspiring stories give us all hope that we'll be able to achieve our own financial dreams. But what if you don't have $50,000, or $10,000, or even $5,000 to get started?

Fear not, Fool -- you aren't doomed to penury and misery. You don't need a trust fund as big as Trouble's to start securing your financial future. Just follow these four simple steps:

  1. Start today!
  2. Invest regularly. Every month, put away $250, $100, even $50.
  3. Look to the stock market for your best hope of realizing your dreams.
  4. Seek undervalued small-cap stocks for your greatest returns.

Why small caps?
Small caps offer the greatest potential for market-beating returns. Institutions tend to ignore these tiny stocks, and analysts don't cover them. By the time anyone realizes they're there, they've already grown and appreciated in price. To find these future giants, we'll screen for stocks with:

  • Market values less than $2.5 billion, to qualify as a small caps.
  • Share prices above $5, to weed out penny stocks.
  • An earnings surprise of 20% or more last quarter.
  • The prospect of growing earnings at least 20% annually for the next five years, according to analysts.

We'll filter our findings through the collective investing wisdom of the more than 94,000 professional and novice investors in our Motley Fool CAPS community. If the best and brightest CAPS players think these stocks hold potential, we ought to take notice, too.

Here are some of the stocks this simple screen found:

Company

Market Cap

Share Price

Earnings Surprise

5-Yr Growth Est.

CAPS Rating (5 max)

Evergreen Solar (NASDAQ:ESLR)

$1.18 billion

$9.75

125%

35%

***

American Dental Partners (NASDAQ:ADPI)

$123.7 million

$9.65

35%

20%

***

ShoreTel (NASDAQ:SHOR)

$231.3 million

$5.39

167%

23%

****

Opnext (NASDAQ:OPXT)

$358.8 million

$5.55

800%

25%

***

CryoLife (NYSE:CRY)

$260.0 million

$9.41

67%

30%

***

Screen results courtesy of MSN MoneyCentral; data courtesy of Yahoo!; CAPS ratings courtesy Motley Fool CAPS.

Of course, this is not a list of stocks to buy -- just a starting point for more research. We need to look more closely at these companies to see whether analysts' faith in them is well-founded. Starting with the CAPS community's favorites seems like a good place to begin.

Shoring up revenue
While some big-name companies can successfully IPO in a tough market -- Visa (NYSE: V  ) is one -- smaller companies often need a better economy to withstand the markets' closer scrutiny. Enterprise IP communications provider ShoreTel went public last year, and it's been one of the worst-performing IPOs since. Despite beating earnings estimates, ShoreTel got pummelled in early January after announcing lower revenue. Sales to new customers declined, even as sales to existing customers rose -- a trend confirmed by the earnings release at the end of the month.

Still, ShoreTel offers a top-notch product that has won accolades from industry reviewers like PC Magazine. Investors like CAPS All-Star tenmiles find the company's new lower price -- about half of its IPO launch -- an attractive entry point. Here's tenmiles' pitch following that announcement in early January:

The next several quarters will likely witness a series of small cap thrashings providing good entry points for patient investors. ShorTel is today's story - bad miss, but at current price around $6 trades at a significant discount to last July's IPO and looks interesting. Debt free with nearly 40% of current market cap in cash; competitive IP enterprise environment, but much of that seems discounted by today's stock collapse - apparent value here for long term captial gain investors.

Foolish final thoughts
Academics will tell you that individual investors have little chance of beating the stock market. They say the Warren Buffetts, Shelby Davises, and Peter Lynches are the exceptions to the rule. At The Motley Fool, we don't agree. Stock investing is not brain surgery. Finding good, undervalued companies is not as difficult as the professionals want you to think.

It is possible to make a more comfortable retirement for yourself, even if you have little money to start with, or you're starting late in life. It is possible to turn $100 into $1 million. You just have to commit: Do it now, and do it regularly. No amount is too small. Let's get started. There's no time to lose!


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