Finding the Next Big Stock

It's a question that haunts investors: "How did I let that stock get away?"

We all have our own story. Many times, the stock was sitting right under our nose and we talked ourselves out of making an investment. Such a mistake can be discouraging, to say the least.

The important thing is not to give up searching for the next big stock. That's where Motley Fool CAPS can help. Our new stock screener, combined with the opinions of more than 100,000 investors participating in CAPS, can help you whittle down the list of potential winners.

It's a simple equation
In the short term, the market is unpredictable. In the long run, however, the market rewards companies that:

• Consistently increase shareholder value.
• Grow more quickly than their peers do.

For example, in 1972, Wal-Mart was a tiny retailer with 51 stores in five states. It had plenty of room to grow, and over the next five years, Wal-Mart began to show signs that it was going to be a major player:

Year	1972	1973	1974	1975	1976
Number of stores	51	64	78	104	125
Return on equity	27.0%	18.5%	20.0%	17.2%	23.7%

Source: Wal-Mart annual reports.

Wal-Mart's promise was difficult to miss. Not only was it expanding rapidly, but it was also generating solid returns on investors' equity year after year. Over the next 32 years, Wal-Mart sustained that performance in its business and generated 25% annualized returns for investors -- enough to turn a $1,000 investment in early 1976 into more than $1.2 million today.

So let's try it
Using the CAPS screener, I searched for highly rated small companies (less than $1 billion) that possess traits similar to what Wal-Mart had in its youth:

• Return on equity greater than 15%.
• Insider ownership greater than 10%.
• Three-year annual sales growth greater than 15%.

Here are a few of the results:

Company	CAPS Rating (out of 5)	Sector
American Dairy (NYSE: ADY)	****	Consumer goods
NIC (Nasdaq: EGOV)	*****	Technology
RPC (NYSE: RES)	*****	Basic materials
The Ensign Group (Nasdaq: ENSG)	****	Health care
Integra Lifesciences (Nasdaq: IART)	****	Health care

Data from Motley Fool CAPS as of April 30.

These stocks appear to be promising, but this is not a list of formal recommendations. Instead, use it as a starting point for further research.

The government of the future
Government processes are notoriously bureaucratic and slow-moving, and they're typically behind the times in terms of technology. Kansas-based Web site management outfit NIC is here to bring government websites into the 21st century in order "to increase efficiency and reduce costs for governments and their constituents." Its client list, for example, includes the state governments of Nebraska, Virginia, and Arizona, which use NIC's services for, among other things, DMV services and tax information.

Since its listing on the Nasdaq in 1999, NIC's revenue has grown at a promising clip of 23% per year on average. The company has generated a profit each year since 2003 and doubled its bottom line in the past four years. 

Co-founder Jeffery Fraser remains on board as the chairman of NIC, and owns about 1% of outstanding shares, but the company is largely in the hands of private equity firm Hellman & Friedman, LLC, which owns around 34% of outstanding shares.  

NIC's stock has been rattled so far this year, currently sitting 27% off its December 52-week high. CAPS investors don't seem to mind the decline -- of the 181 who have rated the stock, fully 175 of them still believe it will outperform the S&P 500. 

Last October, CAPS player jd8019 noted NIC's strong position in its niche and its impressive balance sheet as reasons to remain bullish:

This company has a niche in a market with high demand, ie the government. It has 140 million in assets and no long term debt. It provides outsourcing for government websites, databases, etc and already has contracts with 20 states and several local governments.

There are certainly risks associated with investing in a company whose primary clients are government bodies. For one, lengthy and politically charged appropriations processes could hinder further spending on government technology improvements. In addition, what was appealing to one political administration may not look so good for the next, so political turnover could work also against NIC. The company does appear to be financially sound, however, which could help it sustain growth in a down market.

What do you think about NIC -- or any other stock, for that matter? Join the other 100,000 investors participating in Motley Fool CAPS today, and make your voice heard!