The Best Stocks for the Next 10 Years

The best stocks of the past 10 years all started small. That's documented fact, and it's something any investor putting together a portfolio should know.

But -- as many readers have pointed out -- that fact is also backward-looking. They want to know what the best stocks of the next 10 years will look like.

I'm no soothsayer, but I'll give it a college try ...
Far be it from me to shun the lessons of history, so I'll go out on a limb and predict that the best stocks of the next 10 years will start small -- as in a market cap of a few hundred million or less. Of course, if you take the world's major exchanges as our oyster, that means we're looking at more than 11,000 prospects.

In other words, it's not a big help, I know.

Of course, any tiny company that aspires to greatness will need some significant tailwinds. A recent business trip gave me quite a few insights into a truly hurricane-force gale.

We're live from the center of the storm, Bob
Small companies with big opportunities can be difficult to come by in the United States. That's because our economy is mature, and most every industry is dominated by one or two large-cap players. Aerospace has Boeing (NYSE: BA  ) ; cigarettes have Altria (NYSE: MO  ) ; food has Kraft (NYSE: KFT  ) ; semiconductors have Intel (Nasdaq: INTC  ) and Texas Instruments (NYSE: TXN  ) .

Any company that wants to make inroads in these industries has some high hurdles to clear.

Where large-cap industries are dominated by small-cap companies
That, however, is not as much the case in a little country called China. Maybe you've heard of it.

For a long time, the Chinese economy was the enterprise of the state. And though it's been liberalizing lately, many sectors remain closed to foreign firms. This has a created an enormous opportunity for small Chinese companies to take hold in newly private niches. And while the China story has been going on for years now, it's still young. As Roth Capital's Gordon McBean told us during our visit to the firm's office in Shanghai, "It's not the seventh inning. It still feels early."

But investing in Chinese small caps isn't necessarily a risk-free proposition.

Will you pay to play?
Chinese stocks tend to be expensive. Of the 76 Chinese companies listed on our major U.S. exchanges, just 23 have a price-to-earnings ratio (P/E) less than the S&P 500's. And some of the better-known names, including Home Inns (Nasdaq: HMIN  ) and (Nasdaq: BIDU  ) , are trading for triple-digit multiples.

Maybe those multiples are deserved. As Roth Capital noted in its February report on the Chinese economy, China has the world's best economic growth record -- posting 9.7% annual growth over the past 26 years. More importantly, that growth is expected to continue as urban migration and the development of western China roll onward.

Not much of a riddle
What do you get when you combine the world's fastest-growing economy, entrepreneurial small companies, and a political environment that in effect incubates these companies? A recipe for remarkable returns.

But don't just go throwing money in blind. That's how you'll get wiped out when growth slows and competition increases.

Instead, focus on finding the best-run small Chinese companies that are also operating within the widest niche market opportunities. Roth Capital's Mr. McBean has some tips:

  1. Steer clear of companies with government-run ownership structures. They won't be entrepreneurial enough.
  2. Don't invest in companies that compete against government-run companies. It won't be a level playing field.
  3. Keep tabs on the five-year plans the government releases. The Chinese government is efficient when it comes to achieving these goals. Seek out the companies that will help the government make its plans happen.
  4. Look for consumer companies that will benefit from increasing consumer affluence. The Chinese are getting richer, and they're looking to spend on luxuries such as travel, designer clothes, and nicer homes.

Get your Chinese small caps
While these tips are specific to investing in China, you also don't want to forget your investing fundamentals. That means doing a thorough background check on company management, and careful valuation work to make sure you don't overpay.

Motley Fool Global Gains advisor Bill Mann recently returned from a research trip to China, where he met with several companies that fit this model. You can get all of his updates from that trip, as well as a look at the international stocks he is recommending today, by joining Global Gains free for 30 days. After all, you don't want to miss out on one of the best stocks of the next 10 years.

Tim Hanson does not own shares of any company mentioned. Kraft is a Motley Fool Income Investor recommendation. Intel is an Inside Value pick. is a Rule Breakers selection. The Fool's disclosure policy knows no bounds.

Read/Post Comments (2) | Recommend This Article (175)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 06, 2008, at 1:26 PM, shella1971 wrote:

    FArm Aid, Peace in the corn. Yellow is sunshine and the color of old, Everyone eats corn, its Golden.

    Support framers who need help with their crops and Peace and Love remains on top. Power of suggestion that secret is True. Because I trusted God, how bout you? Beleive it or not I ate mostly corn when i was Pregnant with my Manni Pie..In the books Manni is a Prophet. "Animals and Children tell the truth they never lie which one is more human now there's a you decide...savage Garden"

  • Report this Comment On October 08, 2008, at 12:03 AM, sb101cu wrote:

    If it is going to be a really Foolish community, then when will TMF start a policy of having commentators,

    who own the stock they recommned. I would love to hear the comments of others. Thanks

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 529757, ~/Articles/ArticleHandler.aspx, 10/26/2016 7:27:38 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,199.33 30.06 0.17%
S&P 500 2,139.43 -3.73 -0.17%
NASD 5,250.27 -33.13 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/26/2016 4:00 PM
BA $145.54 Up +6.52 +4.69%
Boeing CAPS Rating: ****
BIDU $172.82 Down -3.86 -2.18%
Baidu CAPS Rating: *****
INTC $34.92 Down -0.18 -0.51%
Intel CAPS Rating: ****
KRFT.DL $0.00 Down +0.00 +0.00%
Kraft Foods CAPS Rating: *****
MO $64.52 Down -0.19 -0.29%
Altria Group CAPS Rating: ****
TXN $71.71 Up +0.51 +0.72%
Texas Instruments CAPS Rating: ***