The Stock That Got Away

Just like fishermen, investors love to tell tales of "the one that got away."

We speak remorsefully about the stocks that could have, would have, or should have made us a fortune -- if only we had made an investment.

Maybe you were an early customer of Green Mountain Coffee Roasters or a diehard Apple fan (even through the dark days before Steve Jobs' return), but you didn't invest in either company back then. Now, each time you hear that they're two of the market's 10 best stocks from 1998 to 2007, you wish you could time-travel back to May 1998 and invest $1,000 in each company. Today, those tiny investments would be worth $35,580 and $26,351, respectively.

Sadly, the flux capacitor is fictional.

Mustard seeds
"The stock that got away" is usually a small company that made it to the big leagues. It makes sense that this would be the case, because those are the stocks with the most room to grow. You simply don't hear stories about people missing the early boat on mega caps like JPMorgan Chase (NYSE: JPM  ) -- unless the storyteller was born in 1902.

That's because, although large companies such as these may have many years of steady growth ahead of them, their high-growth stages have long since passed.

Johnny-come-lately
One of the worst things an investor can do is invest in "the stock that got away" after it has reached large-cap status, in hopes that it will repeat its past performance. The law of diminishing returns makes such a feat very difficult to achieve.

Consider:

Company

Return May 1988-May 1998

Return May 1998-May 2008

Illinois Tool Works (NYSE: ITW  )

922%

85%

Thermo Fisher Scientific (NYSE: TMO  )

686%

87%

Progressive (NYSE: PGR  )

1,754%

83%

Nike (NYSE: NKE  )

1,937%

235%

Data provided by Yahoo! Finance.

As you can see, there's a stark difference between the stocks' most recent 10-year returns and their previous 10-year returns.

Catch the next one
The good news is there's no need to dwell on "the stock that got away." Tomorrow's big catches are out there right now, masquerading as small caps. The problem is, it can be hard to locate tomorrow's winners among the thousands of small companies on the market.

To get started, look for companies that have founders with large personal stakes, have little or no debt on their books, and have dominant positioning in their market niche. These are some of the criteria Fool co-founder Tom Gardner and the Motley Fool Hidden Gems team use to select small-cap stocks for their subscribers. That tack works. Since July 2003, their strategy has outperformed the market by nearly 26 percentage points.

If you'd like, a 30-day free trial will give you access to every one of their stock recommendations. Just click here to get started -- there's no obligation to subscribe.

This article was originally published Jan. 25, 2007. It has been updated.

Urban Outfitters was the one that got away from Todd Wenning. He does not own shares of any company mentioned. Apple is a Motley Fool Stock Advisor choice and JPMorgan Chase is an Income Investor pick. The Fool has a disclosure policy.


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