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The Best Small Cap for 2007: Walter Industries

They say a picture's worth a thousand words, so let's get right to it and sneak a peek at the long-haul performance of Walter Industries (NYSE: WLT  ) , shall we?

Ready? Take a look.

Now, as a caption for that picture, consider this: For the 10-year period that ended with November, this multifaceted industrial-goods player delivered an industry- and market-beating annualized return of 14.5%. Put in dollar-and-cents terms, an investor who plunked down $1,000 at the beginning of that period would have seen his or her money nearly quadruple by the time Turkey Day 2006 rolled around.

Impressive, no?

As those facts suggest, this Tampa-based concern has been a solid overachiever, the kind of small-cap that calls into question the myth of the asset class's "inherent" volatility. Are the little fish more prone to spills and thrills than the big boys are? Well, sure. Are there plenty of 'em that deliver the goods for investors over the long haul anyway? Absolutely, and Fool honcho Tom Gardner and his team at the Motley Fool Hidden Gems investing service scour the market for them on a daily basis. They apply proven, battled-tested criteria that you can read all about here and here. Once you've had a chance to check out those write-ups, come on back, and we'll drill down on Walter Industries toward the end of determining whether -- its former glory aside -- the company is a forward-looking keeper, too.

History lesson
The stock's recent history is a mixed bag. It's shot up nicely over the past month, but, thanks in part to lackluster recent results at the company's natural-resources unit, Walter is basically flat on a year-to-date basis. What's more, the company currently trades more than 30% below its 52-week and five-year highs.

To my contrarian way of thinking, however, that's actually good news.

For starters, there's much more to this company than just natural resources. Walter's diversified revenue stream issues as well from its homebuilding, financing, and "water infrastructure" -- a.k.a. plumbing parts -- operations. The company has a worldwide customer base to boot.

The upshot? Walter hasn't put all of its eggs in one revenue basket, and when one part of the company falls temporarily on tough times, another can be there to prop up the operation as a whole. Ergo, while the firm resides in a sector -- industrial goods -- that counts the likes of Masco (NYSE: MAS  ) and Cemex (NYSE: CX  ) among its members, Walter also plays on a field that includes such homebuilders as Centex (NYSE: CTX  ) , Pulte Homes (NYSE: PHM  ) , DR Horton (NYSE: DHI  ) , and Lennar (NYSE: LEN  ) .

Don your CAPS
To be sure, the company's profile is changing: Walter is wrapping up a spin-off of its Mueller Water Products subsidiary (NYSE: MWA  ) and has mulled making similar moves for its homebuilding operation.

In the assessment of my colleague Bill Mann, though, going that route would likely "unlock substantial value." I concur with Bill's take and think that, with a forward price-to-earnings (P/E) ratio that looks as scrawny as the company's current P/E looks rich, it's only a matter of time before everyone loves Walter again. If you agree, I encourage you to head on over to The Motley Fool's new CAPS service and tap Walter as an outperformer over the next year and beyond. If, on the other hand, you think the company remains overvalued, you can "short" it with CAPS by predicting that Walter will lag the S&P.

If you haven't tried CAPS yet, not to worry: Setting up a profile is a blast, and so is watching how your predictions hold up against a database of other forecasts from a community of investors that's currently almost 15,000 members strong.

Give CAPS a whirl for free -- and to cast your vote on Walter Industries' forward-looking prospects!

Seen our other contenders for best small cap? If not, click here.

Walter Industries is aMotley Fool Hidden Gemsrecommendation.

Shannon Zimmerman runs point on the Fool'sChampion Fundsnewsletter service and co-advises GreenLight. At the time of publication, he didn't own any of the companies mentioned. Check out the Fool's strict disclosure policy.

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