The One Stock You Must Buy

Stop me if you've heard this one. The one stock you must buy is ... the next Apple (Nasdaq: AAPL), Amazon.com, eBay (Nasdaq: EBAY), and Garmin (Nasdaq: GRMN), all rolled into one.

That's a pitch I'm sure you've heard some semblance of at cocktail parties, golf outings, weddings, and, of course, on the Internet.

And it's a pretty appealing pitch. After all, Apple, Amazon, eBay, and Garmin are some of the stock market's great success stories. These companies have earned early investors mind-boggling returns over very short periods of time.

The secrets of success
So the question is: Does that one stock you must buy exist? Of course it does. But can you find it? That's a different matter.

Here, however, is a litmus test to gauge every stock tip you come across. Simply ask: Does this company bear any resemblance at all to Apple, Amazon, eBay, or Garmin before they were big names?

That's not to say that one stock will be a tech superstar. Instead, Apple, Amazon, eBay, and Garmin all share a set of remarkable traits that characterized them when their amazing runs began. All were:

1. Small.
2. Led by a dedicated founder (or founders).
3. Fiscally conservative.
4. Profiting from a wide market opportunity.

If the next stock pitched to you lacks these traits, you're probably better off passing.

A case study
Consider, for example, the cases of Advanced Micro Devices (NYSE: AMD) and Altera (Nasdaq: ALTR) -- two tech plays touted to me at cocktail parties, golf outings, weddings, and of course, on the Internet.

Are they small? No. AMD and Altera are $4 billion and $6 billion companies, respectively.

Are they led by dedicated founders? No. Both Hector Ruiz and John Daane came from other companies. Neither owns a significant percentage of his company's shares, though Ruiz does own $2.9 million worth of AMD shares.

Are they fiscally conservative? Yes and no. While Altera has a strong balance sheet and business that generates healthy cash flow, AMD -- thanks to the capital-intensive nature of its business and competition with Intel (Nasdaq: INTC) -- swung to a loss last year and continues to spend enormously on capital expenditures.

Do they have wide market opportunities? Things get a little cloudy here. While both companies have opportunities to grab greater market share, they both operate in extremely competitive industries. Whatever gains they make will be hard-fought and may not last.

The Foolish final word
I'm not here to be negative about either AMD or Altera. Both could make for good investments going forward. I don't, however, think either one has the core traits that made companies like Apple, Amazon, eBay, and Garmin such incredible investments and that we look for at our Motley Fool Hidden Gems small-cap investing service.

Again, we believe that tomorrow's big winners will start off:

1. Small.
2. Led by a dedicated founder(s).
3. Fiscally conservative.
4. Profiting from a wide market opportunity.

If you'd like to take a look at the companies we've found that meet the four criteria mentioned above and have put our service 23 percentage points ahead of the S&P 500 since 2003, click here to join Hidden Gems free for 30 days.

This article was originally published on Oct. 19, 2006. It has been updated.

Tim Hanson does not own shares of any company mentioned. Apple, Amazon, eBay, and Garmin are Stock Advisor recommendations. Garmin is also a Global Gains selection. Intel is an Inside Value pick. The Fool's disclosure policy assures you that no stocks were harmed in the penning of this article.