It's the Market's 10 Best Stocks

It's an email we get all the time from Motley Fool readers like you:

I have a problem. I just came into some money and want to invest it. I have at least 10 years before I expect to need it. What should I buy?

It goes without saying that this is a great problem to have. Better yet, there's a clear answer to the question.

But before I get to the answer, I want to show you why it's the answer. And to do that, we have to go back in time 10 years.

Fire up the flux capacitor
One of the best ways to learn how to invest successfully is to study how others have invested successfully in the past. This means reading the letters of master investors like Warren Buffett and Bruce Berkowitz, as well as studying companies that have produced incredible returns for longtime investors.

With that last aim in mind, at the end of each year I compile a list of the top-performing stocks over the trailing 10-year period. By looking at this collection of massive outperformers, I hope to learn where I might find the massive outperformers of the next 10 years.

With that as background, let's take a look at this year's list:

Company

Return, 2000 to 2009

Medifast

9,244%

Green Mountain Coffee Roasters

7,342%

XTO Energy

6,988%

Hansen Natural

6,563%

Bally Technologies

5,407%

Southwestern Energy

5,269%

Terra Nitrogen

4,752%

Contango Oil & Gas

4,452%

Clean Harbors

4,424%

Amedisys

4,208%

Data from Capital IQ, a division of Standard & Poor's, through Dec. 15, 2009.

What does Green Mountain, the maker of the Keurig coffee machine, have to do with an energy play recently acquired by ExxonMobil? The answer is not obvious until you see this:

Company

Market Cap, 2000

Medifast

$2 million

Green Mountain

$27 million

XTO Energy

$427 million

Hansen Natural

$43 million

Bally Technologies

$31 million

Southwestern Energy

$165 million

Terra Nitrogen

$93 million

Contango Oil & Gas

$6 million

Clean Harbors

$14 million

Amedisys

$4 million

Data from Capital IQ.

The secret to investing success
What did all of these incredible outperformers have in common when their amazing runs began? They were all very small companies. And where should you be investing at least a portion of your money for the next 10 years? In very small companies.

That's because despite their growth potential, these stocks are overlooked by analysts, investors, and the media alike. That creates mispricings in the marketplace -- and when you combine mispricings and growth, you get the opportunity for super returns.

So if you want to buy the stocks that offer the best potential returns, you need to look past megacaps such as Coca-Cola and dig into the depths of the market to find a former small fry like Hansen Natural -- a stock that was once called "the next Coke."

Don't believe it? Take a look at the returns of some of the top 10 non-small caps of the past 10 years:

Company

Return, 2000 to 2009

Yanzhou Coal Mining (NYSE: YZC  )

1,620%

Vale

1,620%

PotashCorp (NYSE: POT  )

1,279%

Gilead Sciences (Nasdaq: GILD  )

1,129%

Express Scripts (Nasdaq: ESRX  )

980%

PetroBras

913%

Occidental Petroleum (NYSE: OXY  )

913%

British American Tobacco

871%

Canadian Natural Resources (NYSE: CNQ  )

823%

Sasol (NYSE: SSL  )

767%

These returns are nothing to sneeze at, but they just don't stack up to the small caps.

They're out there
But don't misinterpret me. I don't want you to go gambling on penny stocks. Rather, I want you to go out and find very small companies that have clear growth strategies and a track record of actually making money for shareholders. Because it's only by combining potential and quality that you might find one of the 10 best stocks of the next 10 years.

This is precisely what we've set out to do at Motley Fool Hidden Gems, our small-cap research service, where we put real money behind our top picks. And while I could tell you what those picks are, chances are you haven't heard of them anyway. That's because they're all:

1. Obscure.
2. Ignored.

And most importantly ...

3. Small.

But if you'd like to find out anyway -- no matter how small they are -- you can take a free, 30-day trial of Hidden Gems. Just click here to get started.

This article was first published on Dec. 23, 2009. It has been updated.

Tim Hanson owns shares of none of the companies mentioned here. Coca-Cola is a Motley Fool Inside Value pick. Green Mountain Coffee Roasters and Hansen Natural are Rule Breakers recommendations. Coca-Cola, Sasol, and Petrobras are Income Investor picks. Sasol is a Global Gains recommendation. The Fool owns shares of XTO Energy. Our disclosure policy is one of the top 10 disclosure policies of the past 10 years on this here Internet.


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