3 Winners You Don't Know About

It's time once again to play the role of lab rat and win some cheese: Which investment yielded the biggest gain over the past five years?

1. Software giant Microsoft (Nasdaq: MSFT)?
2. Top media company Time Warner (NYSE: TWX)?
3. Or retailer J.C. Penney (NYSE: JCP)?

If you answered Microsoft or Time Warner, you get a mild electric shock and a trip back to the cage. If you sensed a trick question or happened to be the astute investor who picked J.C. Penney, a nice chunk of cheddar awaits.

Blowout returns for the boring
Selling apparel, shoes, and jewelry at more than 1,000 department stores around the United States has been good for J.C. Penney and its investors. The stock has returned 380% -- or 37% annually -- over the past five years.

Meanwhile, the ever-popular and much-maligned Microsoft has struggled to keep cash flow growing at historical rates. The result there is a meager 18% return.

And the transformation of media consumption from print to digital has been rough on Time Warner. Even the 2001 merger with AOL hasn't been enough to buoy the media giant; it continues to grapple with more advertising dollars going to the Web and away from its print publications. Time Warner has returned zero over the past five years.

Examining five-year returns is purely backward-looking, of course, but the point is that the most popular stocks aren't necessarily the best investments. Often, investors equate popularity and glamour with momentum and growth. This mindset can backfire, because stock popularity often makes shares outrageously expensive, leaving even good companies vulnerable to painful downturns.

Sniffing out the good cheese
The notion that investors have a better chance of finding killer stocks where few people go looking is not new. Though it seems to be seldom practiced, I hear it preached a lot from Fool co-founder Tom Gardner and longtime Fool analyst Bill Mann. In their Motley Fool Hidden Gems small-cap service, the duo has singled out several big winners operating in mundane yet profitable niches such as insurance, mattresses, and paper pulp.

And if you're still not convinced that there's big money in the boring, here are three more examples to get you going.

1. j2 Global Communications (Nasdaq: JCOM) has shown that even aging technologies can be transformed into cash cows. j2 Global has brought facsimile technology, a core part of its business, into the 21st century by delivering business faxes via the Internet. The company offers a suite of unified communications solutions to companies of all sizes -- including voice, email, conferencing, and virtual PBXs.

Dramatic, sustained growth has been a hallmark of j2 Global for several years now, with the company clocking in revenue growth of 25.4% in fiscal 2006. The stock has returned investors an amazing 1,570% -- or 76% annually -- over the past five years.

2. Hurco Companies (Nasdaq: HURC) is proof there's profit in the less exciting sectors. The $270 million company makes computer-controlled machine tools that businesses rely on for accurate machining of complex parts. The company has been growing cash flow and paying down debt while growing the top line in at roughly 20% annually for the past few years. Hurco has returned investors more than 1,400% over the past five years.

3. National Healthcare (AMEX: NHC) is a sleepy company in the quiet industry of long-term care. Founded in 1971, National Healthcare operates nursing homes, assisted-living centers, and home care programs for the elderly and sick. While this sector has seen its share of bankruptcies, National Healthcare has actually seen steady growth over the past several years.

While revenue growth is tepid at less than double digits, efficient management at this company has translated into healthy bottom-line growth and cash flow generation. Net income grew more than 28% in 2006, helping to give investors a nearly 230% return on their money over the past five years.

Get in the know
Little-known, well-run companies can do wonders for your portfolio. Go hunting for them in the market's more mundane sectors, and you can get boring to work for you. If you'd like a little help getting started, click here to join Hidden Gems free for 30 days and check out the entire lineup of small-cap stock recommendations.

This article was originally published on June 27, 2006. It has been updated.

Fool contributor Dave Mock runs the rat race every day, but he rarely gets the cheese. He owns no shares of companies mentioned in this story. The longtime Fool is also the author of The Qualcomm Equation. Microsoft is an Inside Value recommendation. Time Warner is a Stock Advisor recommendation. The Motley Fool has a disclosure policy.