Monster Stocks Hiding in Your Closet

Ten bucks says you can't inventory your closet in much detail -- clothes, shoes, maybe a baseball bat or two. But what's lurking in the dark corners of your personal space? Even worse, do you know how long it's been hiding there?

We all have a few long-forgotten collectibles gathering dust in our closets (right next to the skeletons). Some of these odds and ends may not be so scary, though. In fact, they could be quite valuable. Rummaging through the stock market's closet isn't so different -- investors may be quite surprised to find what's there, and even more surprised to discover how much it's worth.

Hiding in dark corners
Imagine it's 1982 and you've received a gift of a few shares of Wal-Mart from your Uncle Joe. You file it away appropriately -- where you'll never find it, of course. Flash forward 25 years: You're cleaning out the closet, and you stumble across those shares. If Uncle Joe had bought you $1,000 worth of Wal-Mart stock at the time, you'd now be sitting on a plump $141,000. Not a bad reward for being forgetful and untidy, eh?

There are literally hundreds of companies out there like Wal-Mart -- familiar, well-managed organizations that don't exactly set investors drooling with visions of great wealth. That's too bad -- some of these drab closet-dwellers pack a powerful punch. Consider some other companies lurking in dark corners but generating amazing returns:

Coach (NYSE: COH)
OK, this one may be a stretch -- chances are most people don't leave accessories from luxury handbag maker Coach lying around in the closet gathering dust. But enough customers have Coach products gracing their walk-in closets to make the manufacturer one heck of an investment over the past several years. Spun out from Sara Lee (NYSE: SLE) in 2000, Coach's sales have grown at a 25% rate since then, yielding investors a 55% compound annual return. And if someone would have come to me seven years ago and said a company making trendy, luxury purses could whomp the market with a 1,855% return, I'd have called them crazy. But here we are.

Coach's powerful brand has successfully captured the attention -- and wallet contents -- of more and more consumers in the premium-accessories market in North America and Japan. Competitors such as Kenneth Cole Productions (NYSE: KCP) and Ralph Lauren (NYSE: RL) offer products in similar segments, but brand differentiation and successful product pricing at different levels -- a strategy Tiffany (NYSE: TIF), for one, has had difficulty emulating -- has allowed Coach to continue expanding with new stores in smaller markets.

American Eagle Outfitters (NYSE: AEO)
It's far more likely that the average consumer has a pair of jeans or a polo shirt from American Eagle, especially if there's a teenager in the house. But like Coach, these fashionable products don't remain on the hook long enough to wrinkle -- fashionable items are meant to be worn and seen in public. American Eagle has been wildly successful at timing fashion trends and growing sales impressively over the past 10 years -- returning investors an incredible 3,375% (or nearly 43% annually) in that time.

Though American Eagle is subject to retail cycles just like competitors Abercrombie & Fitch and Pacific Sunwear (Nasdaq: PSUN), experienced management at the company has guided increased penetration and sales into the teen and young-adult market. The company now hopes to further grow its iconic brand into the 25-to-40 demographic -- another tough fashion nut to crack -- with its Martin + Osa brand.

Come out of the closet
Coach and American Eagle show that great things can come from commonplace sources. Each has a similar story -- they started as small and little-known companies but made their mark by retaining experienced management focused on steadily dominating a product niche with quality products. Nothing too flashy or fancy; just steady growth on the top and bottom line, thanks to efficient management. Both of these companies and many of their competitors show strong results in sales and stock performance thanks to effective inventory management and share repurchase programs.

While some investors spend hours scouring all sorts of industries for great stocks, many know they only need to go as far as their closet to find some killer companies. Unafraid of facing the bogeyman, Motley Fool Hidden Gems lead analysts Tom Gardner and Bill Mann dig through musty closets to find monster stocks with similar traits, long forgotten or overlooked by many investors. Click here for a free 30-day trial, and you can see what surprising winners they've come across.

This article was originally published on April 20, 2007. It has been updated.

Fool contributor Dave Mock is more worried about what lurks in the back seat of his car than in his closet. He owns no shares of companies mentioned in this article. The longtime Fool is the author of The Qualcomm Equation. Wal-Mart is an Inside Value recommendation. American Eagle Outfitters and Pacific Sunwear are Stock Advisor recommendations. The Motley Fool's disclosure policy keeps a flashlight under the bed, just in case.