The Year's Top Stock

When 2007 wraps up, which stock will be standing atop the mountain as the equity that offered the year's best returns?

If the market stopped moving today, the top three would be General Steel Holdings (AMEX: GSI  ) , Advanced Battery Technologies (AMEX: GBT  ) , and China Finance Online (Nasdaq: JRJC  ) -- three tiny Chinese companies that are up 930%, 784%, and 747%, respectively, year to date.

Of course, the market won't stop moving. These stocks have rocketed recently and could be hit by market volatility if or when it rears its ugly head.

But seriously, who cares?
In the grand scheme of things, one-year returns don't matter much.

[Keeping a straight face.]

OK. They don't, but they do ...

What investors in their right mind wouldn't want to make five to 12 times their money and get to brag to everyone that they found, bought, and held the best stock of the year?

Because if recent history is any indication, that's the potential the year's top stock offers:

Year

Company

Return

Industry

Market Cap at Start of Year

2006

Medivation (NASDAQ:MDVN)

523%

Biotechnology

$61 million

2005

NutriSystem

1,164%

Internet retail

$85 million

2004

FiberTower (NASDAQ:FTWR)

600%

Wireless telecommunication services

$292 million

2003

Millicom International Cellular

1,211%

Wireless telecommunication services

$87 million

2002

Hecla Mining (NYSE:HL)

438%

Metals and minerals

$69 million

2001

L-1 Identity Solutions

1,083%

Electronic equipment

$157 million

2000

OSI Pharmaceuticals

909%

Biotechnology

$171 million

Data from Capital IQ, a division of Standard & Poor's.

Those are some heady returns from some very small companies, but that shouldn't be surprising. After all, the best stocks of the millennium, the past decade, and the past eight decades have also all been small caps.

Do you believe?
Even if you'd like to get your hands on the year's best stock, your investing goal should not be to do so explicitly. Instead, as we do at our Motley Fool Hidden Gems small-cap investing service, you should be looking for promising small caps that have growth potential for the next decade our more.

Could you hit upon the year's top stock in this search? Sure. Will you? It's not likely.

That's because the small caps we like to buy to hold are:

  1. Small.
  2. Cheap.
  3. Well run by dedicated management.
  4. Fiscally conservative.
  5. Profiting from a wide market opportunity.

To find those five traits together, we must often concentrate on overlooked, obscure, misunderstood, or distasteful businesses -- and avoid the sex appeal, optimism, and premium price tags of tech and biotech stocks that mostly make up the above list.

Yes, these companies can be rewarding. Since its 2003 performance, Millicom International has run up another 416%. But because investors in these stocks have such high expectations, they can also drop quickly. FiberTower, L-1 Identity Solutions, and OSI Pharmaceuticals are down 72%, 22%, and 51%, respectively, since they posted their best-in-market performances.

If it happens, it happens
Your goal as an investor should not be to find this year's best stock, but rather to fill your portfolio with stocks that will grow steadily for many, many years to come. That's why you need value-priced small caps -- and if you happen to hit on the year's top stock, well, all the better.

You can take a look at all of the small caps we're recommending at Hidden Gems by joining the service free for 30 days. Click here for more information.

This article was originally published Aug. 27, 2007. It has been updated.

Tim Hanson does not own shares of any company mentioned. The Fool's disclosure policy is actually a 25-year-old Hawaiian organ donor.


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