The Way to Make $1.3 Million

Let's get this out of the way from the get-go: There are plenty of ways to make $1.3 million. But if you're not about to sign on as spokesperson for an energy drink or are not willing to put a felony on your record, some ways may not be accessible to you.

My way, however, is.

Let back-testing open your eyes
Thomson Financial recently released a research report documenting the shared characteristics of the best-performing companies from September 2001 through August 2007. As someone who's carved out a niche studying the market's best stocks (also see here or here), I was intrigued.

Thomson studied two principal groups over that time: The 100 best performers capitalized at $5-plus billion and the 100 best performers capitalized from $1 billion to $5 billion back in 2002. Here are the top five names (according to my research) from each group:

Best Companies Capitalized at $5 Billion or More

Company

2002 Market Cap

Return

Apple (NASDAQ:AAPL)

$5,441

1,657%

America Movil

$10,033

1,090%

Posco

$5,047

856%

PetroChina

$33,589

663%

BHP Billiton

$15,651

628%

Data courtesy of Capital IQ.

Best Companies Capitalized Between $1 Billion and $5 Billion

Company

2002 Market Cap

Return

Research In Motion (NASDAQ:RIMM)

$1,203

2,992%

ICICI Bank

$1,172

1,324%

Amazon.com (NASDAQ:AMZN)

$2,166

1,218%

Coach (NYSE:COH)

$1,161

1,198%

Garmin (NASDAQ:GRMN)

$1,744

1,173%

Data courtesy of Capital IQ.

Thomson concluded that across these two universes of companies, the best performers averaged revenue growth between 13% and 15% and earnings-per-share growth between 29% and 38% alongside consistent returns on equity. Those numbers are well above what lesser investments are able to achieve.

In other words, growth is your friend when it comes to stock market catalysts.

But you can do even better
Thomson made another important observation, and it's one that we beat like a drum at Motley Fool Hidden Gems:

The best-performing companies with a market cap of $1+ billion showed on average better growth than those of $5+ billion. This should not be surprising considering smaller companies are able to deliver better earnings and revenue growth.

Indeed, over the same time period, the top-performing companies capitalized between $50 million and $1 billion (which also posted high revenue and earnings growth) crushed their larger peers:

Best Companies Between $50 Million and $1 Billion

Company

2002 Market Cap

Return

MEMC Electronic Materials (NYSE:WFR)

$73

5,631%

Arcelor Mittal

$174

4,618%

Titanium Metals (NYSE:TIE)

$102

3,739%

Bancolombia

$159

2,849%

Gerdau

$546

2,712%

Data courtesy of Capital IQ.

And that's how you could have made your $1.3 million -- by stashing $1,000 in each of the 100 best-performing small companies. Similar investments in the 100 best-performing mid and large caps would have yielded "just" $591,000 and $394,000, respectively.

Make your own $1.3 million
Of course, predicting prolonged periods of high growth before they happen is no small feat. At Hidden Gems, however, we look for a number of indicators, among them:

  1. Tenured corporate leaders who own or are buying a significant number of shares.
  2. Growing operations in a profitable and protected niche.
  3. A wide and unrealized market opportunity.
  4. Expanding profit margins.

Our Hidden Gems team is committed to helping more investors find the market's best small public companies, and our recommendations are beating the broader market by 37 percentage points on average since we opened shop in 2003.

You can take a look at our favorite picks for new money now by joining the service free for 30 days. Click here to get started making your fortune today.

Tim Hanson does not own shares of any company mentioned. Posco is a Motley Fool Income Investor recommendation. Amazon.com and Garmin are Motley Fool Stock Advisor picks. The Fool's disclosure policy cooks ... then chills.


Read/Post Comments (21) | Recommend This Article (89)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 15, 2007, at 6:54 PM, Cade7Flagstaff wrote:

    This makes exciting reading, but I'm wondering if anybody was sharp enough to buy 1000 shares of TIE when it was trading at $1 in October of 2002?

    Would Hidden Gems even consider covering stocks trading this low? All of us would like to have a 3700% return.

  • Report this Comment On October 18, 2007, at 7:31 AM, Hohum777 wrote:

    Cade7Flagstaff-Very good point! It certainly would not have been an MF pick until the stock was $10, perhaps $5 at best. Drill down a little deeper and one finds TIE did a reverse split (1:10) in 2003, so that would be another reason that would caused most MF readers to shy away

    Hohum

  • Report this Comment On October 19, 2007, at 2:00 PM, woo131 wrote:

    The easiest way to make 1.3 million is to buy 2 million worth of plenty of stocks which are going down.

  • Report this Comment On October 19, 2007, at 2:12 PM, chuckchewning wrote:

    Just to open it up a little, how did all the Hidden Gems picks perform in comparison with these high gainers?

  • Report this Comment On October 19, 2007, at 2:51 PM, maurice713 wrote:

    I have been a customer of Motley Fool for many years. My current experiment is with Stock Advisor.

    I now believe the M. F. is more interested in selling publications rather than one super service that would recommcover end the best regardless of sector.

    I like most of your subscribers buy for the long haul, and find it difficult to invest in two or more stocks each month.

    You have hinted at a consolidated publication and portfolio. Offer it soon at a reasonable price and watch the fur fly.

    Maurice Berk

  • Report this Comment On October 19, 2007, at 4:14 PM, javaman2007 wrote:

    MF is only here to make money. So, i am not too bothered about pushing these publications.

    But What i don't like is the above article.

    I would like to know, if the author actually made 1.3mm. Following his own prescriptions.

    Hindsight is always 20/20.

  • Report this Comment On October 19, 2007, at 5:37 PM, QuantGuru wrote:

    Of course he didn't buy as stated above. The article is simply comparing top stocks of the last few years for similarities. These and more can be seen if you read Morgan Stanley's institutional survey from a few years ago. Also Bill O'Neill's (IBD) "How to Make Money In Stocks" is about the same research over the last 30 years (similarities of top performers). Using those points in helping choose your investments, along with good money management, has always gotten me over 20% return.

  • Report this Comment On October 19, 2007, at 9:25 PM, hankin wrote:

    According to this stock screener http://markets.usatoday.com/custom/usatoday-com/screener/scr...

    There're

    3694 companies with 50m-1b

    1267 companies with 1b-5b

    848 companies with >=5b

    Of course you're likely to get more small companies with better returns, there're just more of them. You're also more likely to pick the wrong ones.

  • Report this Comment On October 19, 2007, at 10:35 PM, foolcraze wrote:

    So, let me make sure I get this right. The easy way to make $1.3m is to invest, back in 9/01, in the 100 smaller-cap company whose stocks have gone up the most since then?

    This might be a bit, um, tricky to do in practice.

  • Report this Comment On October 20, 2007, at 12:10 AM, Abnegazar1 wrote:

    When I first started following the Motley Fool, they were different. They were more interested in being a community helping the smaller investor and people with their finances. It was a truly noble sight.

    Then, they charged for the discussion boards ($25/annually), then, they started charging for their information that was previously free (no more checking on the "Rule Breakers" and "Rule Makers" unless you paid for the privilege).

    Now, when I get e-mails, each of the topics discuss one of their "newsletter categories" - Rule your Retirement, Stock Advisor, Small Caps, etc...

    It saddens me (even though I do subscribe to their Stock Advisor service). I have done OK with their recommendations, although I buy long term and not many stocks during the year.

    I do miss the Old Fool - or a consolidated version of their services - with my long term philosophy it would be Foolish to subscribe to more than one service - and having one narrows my scope.

    They have become what David and Tom railed against when I first started following the Fool...

  • Report this Comment On October 20, 2007, at 7:44 AM, kayakmastr wrote:

    The critics shoot at things that aren't in the article and aren't implied by the article. They shoot down their own inferences. The point of the article actually is very clear. Small cap stocks are the ones most likely to produce big returns. Picking the winners is difficult. Follow MF principles and advice and you will do ok. It makes sense that those who benefit should pay a subscription fee for the help. Few good things in life are free.

  • Report this Comment On October 20, 2007, at 7:14 PM, shopkeeper57 wrote:

    I too am tired of the constant salesmanship and hyping of the subscriptions offered by the MF. I think the founders have lost their way, and are into selling advise rather than being foolish with a passion to share. What made the MF great was a community of free thinkers working for a common goal of wealth through the hard work of personal research.

  • Report this Comment On October 21, 2007, at 11:29 AM, Justme1959 wrote:

    I read MF in my local paper and thought I would find some information to help me learn to pick stocks. Now I am more confused then ever because I keep getting offers to buy news letters. Instead of learning the basic principles MF appears on line appears to be more of a selling platform for news letters.

  • Report this Comment On October 21, 2007, at 12:53 PM, RaisingCane wrote:

    Unfortunately the world we live in today is totally different than it was a decade ago. I am a big fan of MF stock advisor however i also agree that for small investors like myself, it becomes difficult to vontinue to buy 2 stocks every month. I also agree that Dave

  • Report this Comment On October 21, 2007, at 9:34 PM, gladnfoolish wrote:

    Don't be TOO hard on David and Tom-a lot of guys would have just cashed in totally and hit the beach. Growth of a publication and finding the right balance is always hard; I do think it a bit unusual to see SO MANY commentaries when you click on the link in these emails we get every few days, where the writer has no position in what they suggest; that, to me, is one MF original cornerstone I really, really miss-the writers in the early days almost always had a skin in the game-or, when they did not, they actually discussed a bit why they did not.

  • Report this Comment On October 21, 2007, at 11:40 PM, adinzo wrote:

    Dave and Tom, it is easy to see from a first time viewer that your sight has changed the perspective of the viewing audience in its mission to attain growth. Some areas of improvement in the customer service sector of the site should be evaluated and changed. People don't want to pay new fees amd charges for additional information that should be included with the original subscription fee. Your company may become a real life example of what happens when you pick one of your small cap/large return comapanies who have failed ans potentially "lost". Take care and best of luck to you both.

  • Report this Comment On October 22, 2007, at 9:12 AM, stanton17 wrote:

    Personally, I think the true value of MF is CAPS. Personally speaking, I interpret everything else as a teaser for one of MF's newsletters.

  • Report this Comment On October 23, 2007, at 11:44 AM, Penny000 wrote:

    I have to agree with the general tone coming across here. MF was special back when their portfolio was started with $50,000. Their results and coverage were much better than today. Now they are starting a new portfolio with $1,000,000 with a goal of taking it to $1 Billion! Not the community it used to be. I sense an opportunity for a new Fool.

  • Report this Comment On October 24, 2007, at 7:28 PM, B8G4CDT wrote:

    MF is a business. They provide services for money. It is not evil to make money or to advertise your business. Short articles that are also ads are just a way to attract more subscribers.

    Would a statement like this make everyone feel better? I thought that all of that information was obvious but maybe it is not.

  • Report this Comment On October 25, 2007, at 1:39 PM, ppaulpaul wrote:

    Abneqazar1: You hit the nail on the head. All they care about is making money. And I'am with you on the old MF when there quest was educating investers.There quest WAS noble, no longer!

  • Report this Comment On November 04, 2007, at 12:18 PM, akociper wrote:

    I must agree that MF is now making better returns on selling publications then it is directing investors like me on how to make money. Its so easy to have so many people looking at every possible angle and then touting only the success stories. How did you guys do in the same period? How many people do you know can easily identify at the right time then invest $1000 in 100 different companies at the start? Put more meat and potatoes into your publications and dont tell me after the fact, need to know more about what is going to take place then what has!!!

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