Stocks Worth Waiting For

"Patience is the companion of wisdom." 
-- St. Augustine

Instant gratification is becoming more and more a part of our culture. Technology has allowed us to obtain information and services whenever we want them. Not sure what the word "indefatigable" means? Google it and have your answer in 0.02 seconds. Heck, you can download an entire music library from the comfort of your own home and play it a few minutes later on your iPod while you're making a quesadilla.

With stocks, however, not much has changed over the years. Large fortunes are still built over years and decades, not minutes and hours.

When we take the time to research a stock and make an investment, it would be nice to receive instant confirmation that we made the right decision. Unfortunately, it might take quite awhile to receive that confirmation.

Consider:

Stock

Total Return Oct. 1998
to Oct. 2001

Total Return, Oct. 2001
to Oct. 2008

National Oilwell Varco (NYSE: NOV  )

27%

160%

Questar (NYSE: STR  )

25%

177%

Cummins (NYSE: CMI  )

7%

278%

Precision Castparts (NYSE: PCP  )

14%

360%

NBTY (NYSE: NTY  )

10%

186%

People's United Financial (Nasdaq: PBCT  )

(10%)

246%

Agrium (NYSE: AGU  )

18%

164%

*Data from Capital IQ, a division of Standard & Poor's.

Patient investors got the last laugh. Even with recent market volatility, each of these stocks crushed the 10-year returns of both the S&P and the Nasdaq.

The mustard seed
It can be particularly trying to wait for smaller companies. While the larger companies have legions of analysts following their every move, small companies attract little or no Wall Street coverage, which means that even if the company is growing, the market might be slow to catch on.

For instance, in May 2003, the best stock of the past 10 years, Hansen Natural, traded at approximately the same price it did in June 1998. During this period, the company ran a good business -- it increased net income by 67% and revenue by 97%, and it posted a double-digit return on equity, while it ramped up its profitable energy-drink lineup.

But the best was yet to come. When Wall Street eventually realized Hansen's growth potential and its strong brand, the stock went up. Today, it's up more than 4,000% in five and a half years -- turning $10,000 into $400,000 today. Patient investors who saw the potential in Hansen's growth strategy have been rewarded, to say the least.

How do I get those returns?!
OK, Hansen might be an extreme example. After all, not many stocks jump 4,000% in five years -- so I'll give you another example.

In July 2004, Fool co-founder Tom Gardner recommended Buffalo Wild Wings to Motley Fool Hidden Gems subscribers. He saw a rapidly growing $200 million restaurant chain with the potential to become a category-killer in casual dining. Moreover, the company had $47 million in cash, zero debt, and high insider ownership.

Everything pointed to higher returns, but 10 months later, the pick was up only 9%. Despite the weak returns, Tom still felt strongly about Buffalo Wild Wings' potential and re-recommended the stock two more times to Hidden Gems subscribers during this period.

Sticking to his guns paid off -- at one point, the original Buffalo Wild Wings pick more than tripled in value, though recent volatility has reduced that gain to 135%. That decline hasn't diminished the team's confidence in the stock, and it continues to recommend it to subscribers.

The Foolish bottom line
Exceptional companies will eventually be recognized by the market -- and when they are, the returns can be huge. Sometimes all it takes is a little patience.

Want to find some great stocks with tremendous upside potential? The Hidden Gems team specializes in finding unrecognized small companies with solid balance sheets, dominant positioning in their markets, and shareholder-friendly management teams. Since 2003, their picks have outperformed the market by more than 8% on average.

Interested? Follow this link for your free trial.

This article was first published April 10, 2007. It has been updated.

Todd Wenning's random '90s movie of the day is PCU, starring a young Jeremy Piven and Jon Favreau. National Oilwell Varco and Precision Castparts are Motley Fool Stock Advisor picks. Buffalo Wild Wings is a Hidden Gems selection and Motley Fool holding. The Fool's disclosure policy is not gonna protest.


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