The best stocks? Is that really what I'm going to write about after a year in which the S&P 500 dropped by more than 40%?
It is, actually, because you learn pretty rapidly in this business that the best way to make money in the market is to invest for the long term and recognize that volatility is part of the ride. And when you commit to the long term, you find out quickly the stocks that offer the best returns today aren't the well-known, widely owned names such as Intel and General Electric.
But I'm getting ahead of myself. Before I can get to the takeaway, I have to show you the data. And the data is a simple list of the top-performing stocks of the past 10 years. I compile this list at the end of every year, and every year it yields the same fascinating insight:
|
Company |
Return, 1999-2008 |
Jan 1, 1999 Market Cap |
|---|---|---|
|
Hansen Natural |
4,801% |
$53 million |
|
Celgene |
4,167% |
$252 million |
|
Quality Systems |
4,002% |
$26 million |
|
Clean Harbors |
3,953% |
$16 million |
|
Green Mountain Coffee Roasters |
3,786% |
$19 million |
|
Deckers Outdoor |
3,374% |
$19 million |
|
Almost Family |
3,122% |
$9 million |
|
XTO Energy |
2,992% |
$343 million |
|
Southwestern Energy |
2,911% |
$187 million |
|
FTI Consulting |
2,907% |
$16 million |
Data from Capital IQ, a division of Standard & Poor's. Includes only U.S.-listed stocks with verifiable stock price histories on major exchanges.
The trait that sets these stocks apart
What does an energy-drink maker (Hansen) have in common with a biotechnology leader (Celgene)? A home-nursing practitioner (Almost Family) with the makers of Ugg boots (Deckers)? A natural-gas driller (XTO) with some guys who sell java (Green Mountain)?
On the face of it, not much. But if you look closely, you'll see that these were all very small companies when their amazing stock market runs began.
Here's what's special about very small companies
And although companies such as Celgene and XTO are big-cap market darlings today that are tracked and owned by big institutions such as Citigroup, Goldman Sachs, TIAA-CREF, and the New York State Common Retirement System, the next Celgene and the next XTO are being ignored and undervalued -- just as Celgene and XTO were 10 years ago! That's because companies like these are too small and too obscure to be worth Wall Street's "valuable" time.
So if you want to buy the best returns, you have to look at stocks today that are:
- Ignored.
- Obscure.
And, most of all:
- Small.
That was the case at the end of 2005, 2006, and 2007 as well.
They're out there
At Motley Fool Hidden Gems, these are precisely the types of companies we spend our time looking for. Rather than track $24 billion Celgene, we follow American Oriental Bioengineering, a $500 million maker of traditional medicines in China. Instead of $20 billion XTO, we've recommended that you get energy exposure by buying $120 million Dawson Geophysical.
Though AOB and Dawson are small, we believe they're well managed, cash-conscious, and poised to take advantage of enormous market opportunities. That last point, after all, is what spurs the best small companies to grow big, and that's what we believe our Hidden Gems recommendations can do for your portfolio.
Your New Year's resolution
So take this lesson from the market's 10 best stocks, and put it to work in your portfolio this coming year by buying small caps. If you'd like some help doing just that, you can see all of our Hidden Gems research and recommendations by joining the service free for 30 days.
Click here for more information.
Tim Hanson owns shares of American Oriental Bioengineering and Dawson Geophysical. Both are Hidden Gems recommendations and Motley Fool holdings. Quality Systems is a Motley Fool Stock Advisor recommendation. The Motley Fool owns shares and covered calls of Intel. This is the Fool's best disclosure policy.
