Promising Stocks Wall Street Ignores

The following information may shock you: Wall Street firms are covering far fewer companies today than they were just a few years ago. According to SmartMoney, "In 2000 ... more than 7,600 companies were covered by at least three analysts. Today, that number is below 6,000."

Which companies get ignored by Wall Street? The smallest ones. In fact, more than 90% of the thousands of publicly traded companies that have no analyst coverage are small caps.

That means opportunity for all of us.

Opportunity? What opportunity?
We know that small companies offer the market's best returns, so the dearth of analyst coverage means that small-cap stocks are more likely to be priced inefficiently. Ergo, we can -- under optimal circumstances -- buy the market's most promising stocks at the market's best prices.

That's a recipe for success, and it's one of the reasons we focus exclusively on researching small- and micro-cap stocks at Motley Fool Hidden Gems. Just take a look at some of the stocks we've highlighted recently, and the number of pros who work their beats.

Company	Market Cap (in Millions)	Analysts Covering
Multi-Color Corp. (Nasdaq: LABL)	$257	3
Mannatech (Nasdaq: MTEX)	$180	1
Monterey Gourmet Foods (Nasdaq: PSTA)	$63	2

Data from Thomson.

Meet the efficient market
Compare that amount of analyst coverage with three of the biggest companies on the market.

Company	Market Cap (in millions)	Analysts Covering
Boeing (NYSE: BA)	$72,523	24
United Technologies (NYSE: UTX)	$73,881	18
General Dynamics (NYSE: GD)	$35,006	21

Data from Thomson.

It's not even close.

There are plenty of reasons why more analysts cover the bigger firms: There's more news, more interest, and more of an opportunity for the firm to make a market in the security. However, those reasons don't include any chance that megacaps offer more gains for the individual investor.

In fact, it's exactly the opposite!

The Foolish bottom line
You can make money investing in a basket of carefully chosen, small, underfollowed companies. That's what we do at Hidden Gems, and over four years our picks are beating the large-cap-laden S&P 500 by 32 percentage points. You can learn more about our specific strategies and recommendations for free for 30 days. Click here for details.

This article was originally published June 17, 2006, as "Stocks With Promise That Wall Street Ignores." It has been updated.

Neither Tim Hanson nor Brian Richards owns shares of any company mentioned in this article. No Fool is too cool for disclosure. Not even Tim. And no, not even Brian.