Stocks Worth Waiting For

"Patience is the companion of wisdom." -- St. Augustine

Instant gratification is becoming more and more a part of our culture. Technology has allowed us to obtain information and services whenever we want them. Not sure what the word "indefatigable" means? Google it and have your answer in 0.02 seconds. Heck, you can download an entire music library from the comfort of your own home and play it a few minutes later on your iPod while you're making a quesadilla.

With stocks, however, not much has changed over the years. Large fortunes are still built over years and decades, not minutes and hours.

When we take the time to research a stock and make an investment, it would be nice to receive instant confirmation that we made the right decision. Unfortunately, it might take quite a while to receive that confirmation.

Consider:

Total Return, January 1998
to January 2001

Total Return, January 2001
to January 2008

Ameristar Casinos (NASDAQ:ASCA)

7%

1,263%

Tractor Supply (NASDAQ:TSCO)

3%

872%

Chicago Bridge & Iron (NYSE:CBI)

19%

971%

Southwestern Energy (NYSE:SWN)

(16%)

2,202%

Weatherford International (NYSE:WFT)

17%

172%

Icahn Enterprises (NYSE:IEP)

(6%)

1,046%

Autodesk (NASDAQ:ADSK)

(4%)

338%

Data provided by Capital IQ.

Investors who held these stocks between 1998 were disappointed, particularly since that was a time when the market was doing well.

But patient investors got the last laugh. Each of these stocks crushed the 10-year returns of both the S&P and the Nasdaq.

The mustard seed
Smaller companies can be particularly trying to wait for. While the larger companies have legions of analysts following their every move, small companies attract little or no Wall Street coverage, which means that even if the company is growing, the market might be slow to catch on.

For instance, in May 2003, the best stock of the past 10 years, Hansen Natural, traded at approximately the same price it did in June 1998. During this period, the company ran a good business -- it increased net income by 67% and revenue by 97%, and it posted a double-digit return on equity, while it ramped up its profitable energy drink lineup.

But the best was yet to come. When Wall Street eventually realized Hansen's growth potential and its strong brand, the stock went up. Today, it's up more than 7,260% in almost five years -- turning $10,000 into $736,000 today. Patient investors who saw the potential in Hansen's growth strategy have been rewarded, to say the least.

How do I get those returns?!
OK, Hansen might be an extreme example. After all, not many stocks jump 7,260% in five years -- so I'll give you another example.

In July 2004, Fool co-founder Tom Gardner recommended Buffalo Wild Wings to Motley Fool Hidden Gems subscribers. He saw a rapidly growing $200 million restaurant chain with the potential of becoming a category-killer in casual dining. Moreover, the company had $47 million in cash, zero debt, and high insider ownership.

Everything pointed to higher returns, but 10 months later, the pick was only up 7%. Despite the weak returns, Tom still felt strongly about Buffalo Wild Wings' potential and re-recommended the stock two more times to Hidden Gems subscribers during this period.

Sticking to his guns paid off -- at one point, the original Buffalo Wild Wings pick more than tripled in value, though recent volatility has reduced that gain to 79%. That hasn't diminished the team's confidence in the stock and they continue to recommend it to subscribers.

The Foolish bottom line
Exceptional companies will eventually be recognized by the market -- and when they are, the returns can be huge. Sometimes all it takes is a little patience.

Want to find some great stocks with tremendous upside potential? Tom and his Hidden Gems team specialize in finding unrecognized small companies with solid balance sheets, dominant positioning in their markets, and shareholder-friendly management teams. Since 2003, their picks have averaged 27% returns versus the market's 18%.

Interested? Follow this link for your free trial.

This article was first published on April 10, 2007. It has been updated.

Fool contributor Todd Wenning's random '90s movie of the day is P.C.U., starring a young Jeremy Piven and Jon Favreau. Ameristar Casinos is a Hidden Gems pick. The Motley Fool owns shares of Buffalo Wild Wings. The Fool's disclosure policy is not gonna protest.


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