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 is Wall Street ignoring? 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, and the number of pros who work their beats.
|
Company
|
Market Cap (in millions)
|
Analysts Covering
|
|
Almost Family (:AFAM)
|
$107
|
2
|
|
National Research (NASDAQ:NRCI)
|
$192
|
1
|
|
SmartPros (AMEX:PED)
|
$26
|
0
|
|
Wonder Auto (NASDAQ:WATG)
|
$254
|
5
|
Data from Thomson.
Meet the efficient market
Compare that amount of analyst coverage with that of three larger companies on the market.
|
Company
|
Market Cap (in millions)
|
Analysts Covering
|
|
Disney (:DIS)
|
$60,970
|
25
|
|
Merck (NYSE:MRK)
|
$102,610
|
26
|
|
Microsoft (NASDAQ:MSFT)
|
$267,110
|
43
|
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 large caps 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 our picks are beating the large-cap-laden S&P 500 by 19 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.
Tim Hanson does not own shares of any company mentioned. Brian Richards owns shares of Microsoft. Disney is a Stock Advisor pick. Microsoft is an Inside Value pick. No Fool is too cool for disclosure, and the Brick and Pony duo, as they are known by insiders, is about as cool as it gets.
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