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. Software giant Microsoft (Nasdaq: MSFT)?
2. Top media company Time Warner (NYSE: TWX)?
3. Or retailer J.C. Penney (NYSE: JCP)?

If you answered Microsoft or Time Warner, 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 J.C. Penney, a nice chunk of cheddar awaits.

Blowout returns for the boring
Selling apparel, shoes, and jewelry at more than 1,000 department stores around the United States has been good for J.C. Penney and its investors. The stock has returned 167% -- or 21.7% annually -- over the past five years.

While Microsoft continues to churn out copious cash flow, it has only mustered a market-trailing 31% return.

And the transformation of media consumption from print to digital has been rough on Time Warner. Its AOL unit continues to be a big drag on earnings; the struggling online arm is seeing a big drop in display ad revenue at the same time Google (Nasdaq: GOOG) soars on ads tied to search. Overall, Time Warner has returned only 12% over the past five years.  

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. j2 Global Communications (Nasdaq: JCOM) has shown that even aging technologies can be transformed into cash cows. j2 Global has brought facsimile technology, a core part of its business, into the 21st century by delivering faxes via the Internet. The company offers a suite of unified communications solutions to companies of all sizes -- including voice, email, conferencing, and virtual PBXs.

Dramatic, sustained growth has been a hallmark of j2 Global for several years now. While the company has seen an impact from the overheated housing market recently, earnings still grew faster than revenue in 2007, with sales up 21% and net income higher by 29%. Even after a big drop recently, the stock has returned investors 190% -- or 23.7% annually -- over the past five years.

2. Hurco (Nasdaq: HURC) is proof that there's profit in less-exciting sectors. The recent Motley Fool Hidden Gems recommendation makes computer-controlled machine tools that businesses rely on for accurate machining of complex parts. Hurco has managed to pay down its debt while growing the top line at a 20% clip for the past five years. Hurco has returned a staggering 2,932% over the past five years.

3. National Healthcare is a sleepy company in the quiet industry of long-term care. Founded in 1971, National Healthcare operates nursing homes, assisted-living centers, and home care programs for the elderly and sick. While this sector has seen its share of bankruptcies, National Healthcare has actually seen steady growth over the past several years.

While revenue growth is tepid at less than double digits, efficient management at this company has translated into healthy bottom-line growth and cash flow generation. Net income grew more than 24% in 2007 -- part of the reason investors have seen a 187% return on their money over the past five years.

Get in the know
Little-known, well-run companies 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 no shares of companies mentioned here. The longtime Fool is also the author of The Qualcomm Equation. Microsoft is an Inside Value recommendation. Time Warner is a Stock Advisor pick. j2 Global is a Hidden Gems Pay Dirt pick. Hurco is a Hidden Gems pick. The Motley Fool has a disclosure policy.