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. These curious Fools 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 for 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 we take the world's major exchanges as our oyster, that means we're looking at more than 11,000 prospects. Not a big help, I know.

Of course, any tiny company that aspires to greatness will need significant tailwinds. A recent business trip gave me quite a few insights into a true 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 many industries are dominated by a handful of slow-growing, large-cap players. For instance, McDonald's (NYSE: MCD  ) plus Burger King (NYSE: BKC  ) plus Wendy's (NYSE: WEN  ) pretty much covers the market for fast burgers. And while energy drinks helped Hansen Natural (Nasdaq: HANS  ) grab market share in the beverage business, Jones Soda (Nasdaq: JSDA  ) and others are struggling to find niches alongside giants Coca-Cola and PepsiCo (NYSE: PEP  ) . Any company that wants to make inroads in these industries must clear high hurdles.

Where large-cap industries are dominated by small-cap companies
That's not so much the case in a little country called China. Maybe you've heard of it. For a long time, the Chinese economy was controlled by the state. And though it's becoming more liberal, many sectors remain closed to foreign firms. This creates 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, 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 a risk-free proposition.

Will you pay to play?
Chinese stocks tend to be expensive. Excluding those with negative earnings, the average U.S.-listed China stock has a P/E of 30 and a P/B of 4. That's almost outrageous!

Maybe China's stocks deserve those multiples. As Roth Capital noted in its February report on the Chinese economy, China has the world's best economic growth record. 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 effectively incubates these companies? A recipe for remarkable returns.

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

Instead, focus on finding the best-run small Chinese companies that are also operating within the widest niche market opportunities. Roth Capital's 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. Find the companies that will help the government make its plans happen.
  4. Look for 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 nice homes.

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

The Motley Fool Global Gains team took a research trip to China last year, where we met with several companies that fit this model. Even better, we're headed back in a few weeks.

Take a look at the international stocks we're recommending today and get all of our research from the upcoming trip by joining Global Gains free for 30 days.

Tim Hanson does not own shares of any company mentioned. Jones Soda is a Motley Fool Rule Breakers recommendation. Coca-Cola is an Inside Value pick. The Motley Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (57)

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 April 18, 2009, at 7:13 PM, WoodenBats wrote:

    Another typical example of a MF non-article -- no real useful information at all, just a ploy to get you to subscribe to one of their MF newsletters (which are marginal at best -- the Global Gains recommendations are so far under water that Bill Mann left Nathan Parmalee holding the bag of losers).

  • Report this Comment On November 20, 2009, at 9:23 PM, themoneyladder99 wrote:

    We should also not forget foreign currencies!

    Now, the most important thing to remember is that investing in a foreign currency must never be considered in isolation. Consider its impact on your entire portfolio. For example, let’s say you have $20,000 in U.S. investments and you read an article that is very positive on Brazil so you go and invest $5000 in Brazil. You now have 20% of your overall investments only in Brazil which is a lot, even if you do have most of your investments in domestic currency. Ask yourself if you want to be so exposed to a single country.

    A currency will do well versus the dollar for two reasons:

    (1) The American economy is not doing well, so the dollar weakens. This is true at the moment.

    (2) The foreign economy is doing well, so the foreign currency strengthens.

    All non-dollar currencies share the first reason to some extent, so focus on the second reason. Look for currencies of countries that have low government debt, growing economies, younger population, stable politics, well-run or reforming legal systems and robust capital markets. China, Korea and India exhibit these signs. Countries that produce commodities like oil, copper etc. are also attractive as the world comes out of recession. Australia, Canada and Brazil are examples.

    Again, all investing decisions must be made after considering the entirety of your financial situation.

    http://www.themoneyladder.com

    "smart money advice for smart young people"

  • Report this Comment On November 20, 2009, at 9:23 PM, themoneyladder99 wrote:

    Now, the most important thing to remember is that investing in a foreign currency must never be considered in isolation. Consider its impact on your entire portfolio. For example, let’s say you have $20,000 in U.S. investments and you read an article that is very positive on Brazil so you go and invest $5000 in Brazil. You now have 20% of your overall investments only in Brazil which is a lot, even if you do have most of your investments in domestic currency. Ask yourself if you want to be so exposed to a single country.

    A currency will do well versus the dollar for two reasons:

    (1) The American economy is not doing well, so the dollar weakens. This is true at the moment.

    (2) The foreign economy is doing well, so the foreign currency strengthens.

    All non-dollar currencies share the first reason to some extent, so focus on the second reason. Look for currencies of countries that have low government debt, growing economies, younger population, stable politics, well-run or reforming legal systems and robust capital markets. China, Korea and India exhibit these signs. Countries that produce commodities like oil, copper etc. are also attractive as the world comes out of recession. Australia, Canada and Brazil are examples.

    Again, all investing decisions must be made after considering the entirety of your financial situation.

    http://www.themoneyladder.com

    "smart money advice for smart people:

  • Report this Comment On November 26, 2009, at 9:13 AM, DUTCHMAN67 wrote:

    this article was crap!!!!!!! nothing but a ploy

  • Report this Comment On October 23, 2010, at 8:19 AM, Monica109 wrote:

    Investing in China is a very complex task. You have to do your homework and even then I am not comfortable with putting my money in Chinese companies. Have you read "One Billion Customers" by James McGregor? The latest edition was printed in 2005 but there are still useful information to glean from it. I just returned from a month stay in Changchun, the automotive capital of China. It is in the northeast China and was part of the former Manchuria. Changchun is a city of about 7 million people. There are some U.S. joint ventures there, including Johnson Controls Joint Venture. I was very impressed with my visit to the plant, and their plans to expand in China. Education is very important to the Chinese, and especially for their children.

  • Report this Comment On August 08, 2011, at 9:18 PM, webmind wrote:

    The writer of this article obviously knows nothing about China. Has probably never even been there. China is a train wreck waiting to happen.

    Know anything about bank's non-performing loans? Nope. Real estate bubble? Aging population with an exploding health crisis? Environmental destruction? Corruption?

    It is a black box police state with no transparency. Go ahead and join the pack stampeding into China. See you in deamland.

  • Report this Comment On October 21, 2011, at 4:48 AM, pogo2012 wrote:

    90% of what MF writes is like this - useless fluff. There's almost nothing in the for fee newsletters. The staff spends all their time writing these come-on pieces to sell product.

  • Report this Comment On December 05, 2011, at 4:23 AM, Karin123 wrote:

    Europe is like the real estate market in the US right now. It's down with opportunities to invest, according to Christian Noyer, Governor of Banque de France. In his recent speech: Europe: A Financial Crisis, Not A Monetary One.

    He concludes: History has taught us that financial crises can be extremely violent. The current turmoil in Europe is no exception. In the most intense phases, it is difficult to imagine that there is light at the end of the tunnel. But history has also taught us that crises provide opportunities for reform and progress. We live in democracies and have to accept that political decisions follow their own process and obey their own constraints. But I am confident that the euro area will emerge from this period stronger and more cohesive. There are, indeed, some reasons for optimism. On the supply side, our economies are robust and dynamic. Corporate balance sheets are very strong. Our banking system is robust and well supervised. Emerging economies are well placed to enjoy strong and sustainable growth in the years to come therefore contributing to sustained global demand. Above all, the community of nations seems ready to face the extraordinary challenges we are confronted with.

    Read it on forexpros.com

  • Report this Comment On February 16, 2012, at 8:09 AM, luhkamaeni wrote:

    The investment must be really careful, because it has been a lot of scams

    http://desktopforcomputers.wordpress.com/

  • Report this Comment On January 24, 2014, at 4:52 PM, JoeyB wrote:

    MCD has gone down past year from 106 to 94. I would watch WEN, I'm a big fan and think it's the cheapest one out there to make a profit on. I bought last year at 4.50 around FEB, has doubled and going to get better. If you want watch it for next couple of month's value meal menu is better than MCD and BK. It should go up to 11.00 by beginning of spring.

  • Report this Comment On July 14, 2014, at 9:05 AM, DavidDavis wrote:

    Medical marijuana like ALPHALA is a good choice, this market will be increased cause of legalization

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