Promising Stocks Wall Street Ignores

The following information may shock you: Wall Street analysts cover far fewer companies today than they did just a few years ago.

According to SmartMoney, "In 2000 ... more than 7,600 companies were covered by at least three analysts. Today, that number is below 6,000."

What companies are ignored by Wall Street? The smallest ones. In fact, more than 90% of the thousands of publicly traded companies that have no analyst coverage are small caps.

That means opportunity for all of us.

Opportunity? What opportunity?
We know that small companies offer the market's best returns, so the dearth of analyst coverage means that small-cap stocks are more likely to be priced inefficiently. Ergo, we can -- under optimal circumstances -- buy the market's most promising stocks at the market's best prices.

That's a recipe for success, and it's one of the reasons we focus exclusively on researching small- and micro-cap stocks at Motley Fool Hidden Gems. Just take a look at some of the stocks we've highlighted, and the number of pros who work their beats.

Data from Yahoo! Finance.

Meet the efficient market
Compare that amount of analyst coverage to three of the biggest companies on the market.

Data from Yahoo! Finance.

It's not even close.

There are plenty of reasons why more analysts cover the bigger firms: There's more news, more interest, and more of an opportunity for the firm to make a market in the security. However, those reasons don't include any chance that large caps offer more gains for the individual investor.

In fact, it's exactly the opposite!

The Foolish bottom line
You can make money investing in a basket of carefully chosen, small, underfollowed companies. That's what we do at Hidden Gems, and our picks are beating the large-cap-laden S&P 500 by 22 percentage points.

You can learn more about our specific strategies and recommendations, free for 30 days. Click here for more information.

This article was originally published June 17, 2006, as "Stocks With Promise That Wall Street Ignores." It has been updated.

Tim Hanson and Brian Richards both own shares of Barrett Business Services, but no other companies mentioned in this article. Home Depot is an Inside Value recommendation. No Fool is too cool for disclosure, and Tim and Brian are as cool as the other side of the pillow.