3 Winners You Don't Know About

It's time once again to play the role of lab rat and win some cheese: Which investment yielded the biggest gain over the past five years?

1. Leading computer maker Dell (Nasdaq: DELL)?
2. XM Satellite Radio (Nasdaq: XMSR)?
3. Or heavy-machinery maker Caterpillar (NYSE: CAT)?

If you answered Dell or XM, you get a mild electric shock and a trip back to the cage. If you sensed a trick question or happened to be the astute investor who picked Caterpillar, a nice chunk of cheddar awaits.

Blowout returns for the boring
Supporting infrastructure growth by selling construction and mining equipment has been good for Caterpillar and its investors. The stock has gained an impressive 247% -- or 28.3% compound annual growth -- over the past five years.

Dell's leading position as computer and home office product seller hasn't delivered enough growth to keep the stock rising. The result there is a 25% loss.

And while XM has seen its stock rise 153% in the past five years -- handily beating the S&P -- the fate of satellite radio and merger with rival Sirius hangs in the balance, leaving returns in its shares still well short of Caterpillar.

Examining five-year returns is purely backward-looking, of course, but the point is that the most popular stocks aren't necessarily the best investments. Often, investors equate popularity and glamour with momentum and growth. This mind-set can backfire, because stock popularity often makes shares outrageously expensive, leaving even good companies vulnerable to painful downturns.

Sniffing out the good cheese
The notion that investors have a better chance of finding killer stocks where few people go looking is not new. Though it seems to be seldom practiced, I hear it preached a lot from longtime Fool analyst Bill Mann and his team at the Motley Fool Hidden Gems small-cap service. The Hidden Gems team has singled out several big winners operating in mundane yet profitable niches such as insurance, mattresses, and paper pulp.

And if you're still not convinced that there's big money in the boring, here are three more examples to get you going.

1. Iconix Brand Group (Nasdaq: ICON) is a little-known brand-licensing firm that's behind a few well-known products such as Joe Boxer, Mossimo, and London Fog. Similar to competitor Cherokee, the company keeps margins sky-high and costs low by purposefully staying out of the manufacturing business, instead focusing on the licensing and marketing of brands it owns.

In the past five years, Iconix has returned an amazing 2,274% -- a compound annual growth rate of 88%. The company is relatively small, with a $1.2 billion market capitalization, and just recently inked a license with Sears Holdings (Nasdaq: SHLD) to carry the Cannon brand at Sears and Kmart stores. While buying brands may sound like a boring business, it has generated exciting profits.

2. Alderwoods Group was proof that there's profit in the morose. Not many investors would look into one of the leading funeral-service providers for big gains, but before being acquired by Service Corp., Alderwoods was a textbook turnaround story. Since coming out of bankruptcy in 2002, an experienced management team methodically paid down debt and increased revenue and profits.

Investors who bought the Hidden Gems pick in October 2003 and took the $20-per-share cash offer earned a return of more than 191%, much more than most would expect from a boring industry such as death care.

3. Smith Micro Software (Nasdaq: SMSI) is a tiny $155 million company that sells innovative software tools and mobile communications solutions. Many new products are sold on an OEM basis, in which a wireless carrier integrates Smith Micro's connectivity software into its offering of mobile devices and services.

Rapid revenue and earnings growth, fueled by successful product launches, has provided big gains for investors. Even with a significant slide in shares in the past six months, the little-known software company has returned an amazing 786% over the past five years. Revenue concentration on a few products and customers is still a concern, however. For instance, Verizon (NYSE: VZ) accounted for more than 68% of Smith Micro's revenue in the most recent quarter.

Get in the know
Little-known, well-run companies such as Healthcare Services Group (a Hidden Gems Watch List pick) and commercial oven maker Middleby -- a Hidden Gems pick that's returned 645% since November 2003 -- can do wonders for your portfolio. Go hunting for them in the market's more mundane sectors, and you can get boring to work for you. If you'd like a little help getting started, click here to join Hidden Gems free for 30 days, and check out the entire lineup of small-cap stock recommendations.

This article was originally published on June 27, 2006. It has been updated.

Fool contributor Dave Mock runs the rat race every day, but he rarely gets the cheese. He owns shares of Cherokee. The longtime Fool is also the author of The Qualcomm Equation. Dell and Sears Holdings are Inside Value recommendations. Dell is also a Stock Advisor pick. Middleby is a Motley Fool Hidden Gems pick. The Motley Fool has a disclosure policy.