Get Ready to Buy

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"Over the years, small-cap stocks crush their large- and mid-cap peers."

That's how I planned to open today. Heck, I'd be making my case by now -- dropping names like Nagel and Quigley among 70 years' worth of data from Ibbotson.

But you're no dummy
And by now my inbox would be full. "Your results are skewed by abnormal years," you'd shout, or "What about survivorship bias?" And you'd be right. You'd have found the fatal flaw in all historical data: The future is not the past.

So forget the big data
Fortunately, you don't need Excel to know that tomorrow's big winners are small caps today. You just need three clues. Tomorrow's Microsoft (Nasdaq: MSFT) is...

1. Run by entrepreneurial zealots with ownership stakes.
2. Free of convoluted relationships with investment banks.
3. Able to grow its sales and cash flow exponentially.

And because it's off Wall Street's radar, there will be pent-up demand when those revenues rocket and analysts catch on.

In on the ground floor
My father told me to "be your own boss and die rich." He was right. We cashed in on Oracle (Nasdaq: ORCL) and Dell (Nasdaq: DELL), but not nearly as much as their respective founders, Larry Ellison and Michael Dell. The nearer you got to Henry, the sweeter your investment in Ford (NYSE: F).

Sadly, few of us build empires or place venture capital. But we can get in early. We just need to be patient. Or take a cue from Tom Gardner's Hidden Gems method and seek out:

1. Solid management with big stakes
2. Great, sustainable businesses
3. Dominant positions in niche markets
4. Sterling balance sheets
5. Strong free cash flow

Remember those five keys
They led folks to Intuit (Nasdaq: INTU) in the '90s. They led me to American Eagle Outfitters (Nasdaq: AEOS) and Abercrombie & Fitch (NYSE: ANF) and 1,000% gains. They led the Hidden Gems gang to a half-dozen stocks that doubled or more over the past two years.

This choppy market could be your chance. Market malaise -- even weakness -- can be seasonal and indiscriminate. Right now is the time to build a wish list of small companies to buy on coming dips. I have mine right here.

If you need some help putting your list together, Tom Gardner is offering a 30-day free trial to Hidden Gems.

Paul Elliott no longer owns American Eagle (sadly) or any of the stocks mentioned here.