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 ?
- Leading microprocessor maker Intel (Nasdaq: INTC ) ?
- Network computing company Sun Microsystems (Nasdaq: JAVA ) ?
- Or mining equipment supplier Joy Global (Nasdaq: JOYG ) ?
If you answered Intel or Sun Micro, 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 Joy Global, a nice chunk of cheddar awaits.
Blowout returns for the boring
Selling underground mining machines has been good for Joy Global and its investors. The stock has returned investors 292% -- or 31% annually -- over the past five years, even though it's down over 50% year to date.
Meanwhile, Intel has continued to battle to maintain its market from competitor AMD (NYSE: AMD ) . The company has shown signs of regaining its dominance again, but it has disappointed investors with a 46% loss over the past five years.
And several years of flat sales have left Sun Microsystems looking for profits by squeezing out costs. With growth flat, shares of Sun Micro have lost 67% in 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 great returns, but expensive prices on popular stocks mean this mind-set can backfire.
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. I hear it preached a lot from longtime Fool analyst Bill Mann and his team at the Motley Fool Hidden Gems small-cap service. The Hidden Gems team has singled out several big winners operating in mundane yet profitable niches such as phosphate production, oven manufacturing, and chicken farming.
And if you're still not convinced that there's big money in the boring, here are three recent examples that show how less tantalizing stocks can post exciting returns.
- USG (NYSE: USG ) manufactures and distributes building materials around the world. Primarily dealing with gypsum and plaster materials, USG has long been overlooked by many investors, haunted by the specter of asbestos liability several years back and now the dramatic drop in building due to the housing downturn. But this has created an opportunity that many didn't see -- except for brave souls such as Warren Buffett. Despite all the turmoil, selling drywall has been good for USG and its investors. Since its bottom in 2001 when investors fled for safer ground, the stock has returned nearly 400% to investors, even considering the nearly 50% drop the stock has seen in the past year.
- American Vanguard (NYSE: AVD ) is proof that there's profit in the mundane. No one tends to get excited about companies that develop bug-control products such as insecticides and fungicides. But American Vanguard has turned deer repellant and snail bait into a major growth business. The company has managed to grow the top line in excess of 16% the past five years, and net income has done better than 20% on average. The stock has returned investors nearly 87% during that time, and a whopping 2,670% in the past decade.
- Mine Safety Appliances (NYSE: MSA ) is a maker of health and safety products that Tom Gardner spotted for Hidden Gems members back in 2003. Founded back in 1914, MSA supplies respirators, gas detectors, and fire helmets, among other things, to protect military, fire, and other workers. The company has seen strong sales due to the increased focus on homeland security in the United States. This led to a 120% gain before Tom recommended that members sell the stock after delays in domestic orders for fire and military equipment in 2006 caused the company to lower future growth expectations.
Get in the know
Little-known, well-run companies such as Healthcare Services Group and other small-cap companies have been hammered lately. But picking up a fundamentally sound -- and small -- gem on the cheap 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 which small-cap stocks the team recommends for big profits from new money today.
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 shares of Intel. Intel and USG are Motley Fool Inside Value recommendations. The Motley Fool has a disclosure policy.