These Stocks Will Burn You

In his article "The Market's 10 Best Stocks," my colleague Tim Hanson pointed out the benefits of searching for the next multibagger success stories among the smallest of companies.

And I agree with him: The best stocks of the next decade will not be huge companies. Why not? This chart should explain. Look how large each of these businesses would become if they increased just 10 times in value over the next decade.

Company

Current Market Cap (billions)

10-Bagger Market Cap (trillions)

General Electric (NYSE: GE  )

$164

$1.6

Citigroup (NYSE: C  )

$36

$0.4

Bank of America (NYSE: BAC  )

$64

$0.6

Pfizer (NYSE: PFE  )

$115

$1.2

Intel (Nasdaq: INTC  )

$78

$0.8

Google (Nasdaq: GOOG  )

$94

$0.9

Cisco Systems (Nasdaq: CSCO  )

$95

$1.0

While it's certainly possible, we probably won't have a trillion-dollar company by 2018 -- much less see any of these large caps turn into 20- or 30-baggers. So we can count the giants in that chart out of the running for best performer of the next decade.

Instead, the greatest chance for the greatest gains comes from the smallest of companies, like the Tiny Gems that the Motley Fool Hidden Gems team follow. These half-pint companies are capitalized at less than $200 million, and there's plenty of room for them to grow before they run into the headwinds of large numbers and their prospects become more limited.

But before you take a free trial and jump headfirst into the micro-cap waters, listen up: This ride is not for everybody.

Buckle up
With great potential reward comes great risk. Just as a tiny company has the greatest chance at outlandish gains, it also has the best chance of going belly up. Bankrupt. Gone ... along with your money. And the volatility along the way to greatness or the graveyard may give you whiplash.

Thus, these Tiny Gems are best suited for risk-tolerant investors with a long-term outlook.

That said, two things can greatly reduce the chance that your portfolio will get torched by tanking Tinies:

1. Believe the balance sheet. This is where you can tell whether a company is in danger. Little cash and large amounts of debt are a big warning sign, especially for businesses not yet turning a profit. Go back through the past several balance sheets. Is the company burning through cash? How fast? My advice: Stick to profitable companies with cash-to-debt ratios of at least 1.5.

2. Buy a "basket" of these micro caps. In other words, allocate the amount of funds you normally would for one stock to several of the Tinies -- four or five, for example. That way, you're giving yourself more of a chance at finding at least one huge gainer, which will more than make up for it if one or two of the others lose most of their value.

Are you still ready to forge onward to Tinyland? Good. Start here for information on a free trial of Hidden Gems, whose official small-cap recommendations (which are larger than Tiny Gems) are outpacing the S&P 500 by an average of seven percentage points since inception in 2003.

This article was first published Jan. 30, 2006. It has been updated.

Rex Moore helps the team pan for micro caps and is an analyst for Stock Advisor. He owns no companies mentioned in this article. The Motley Fool owns shares of Pfizer, as well as shares and covered calls of Intel. Bank of America and Pfizer are Motley Fool Income Investor recommendations. Pfizer and Intel are Motley Fool Inside Value recommendations. Google is a Rule Breakers selection. The Motley Fool is investors helping investors.


Read/Post Comments (16) | Recommend This Article (90)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 27, 2008, at 11:09 AM, mktgeek wrote:

    Seems to me that these Motley Fool articles have no substance - they are merely come-on ads to buy their newsletters and such.

    Don't waste your time.

  • Report this Comment On December 27, 2008, at 11:48 AM, IBDRULES5656 wrote:

    Agreed with above post, many articles of great past performances listed. I'll stick with O'neil and the factual IBD, then I can make my own mistakes!!!

  • Report this Comment On December 27, 2008, at 12:55 PM, rmarieg wrote:

    Well it's a subscription-based thing after all, and they DID provide an intersting illustration of why these larger companies might not be jackpots in the log run. Why should they publish everything for free?

  • Report this Comment On December 27, 2008, at 1:05 PM, lturbo wrote:

    Just try working with Motley Fool for a while and I think you'll become a believer.

  • Report this Comment On December 27, 2008, at 2:38 PM, moronpolitics wrote:

    Look how big GE would have to be if increased ONLY ten times it's present value. Why I shall have NONE of such stocks! Fie upon them.

  • Report this Comment On December 27, 2008, at 3:01 PM, corkbouy wrote:

    Hidden gems did nothing for me last year. I don't recommend it. Although in their defense, please consider last year's market fall.

    This could become a good time to subscribe to hidden gems unless the market and the economy fall more this year, and have more turmoil, which I expect.

  • Report this Comment On December 27, 2008, at 5:23 PM, gwhitebeard wrote:

    Well, M-Fools, you forgot one extremely meaninful addition to this equation. Namely the DIVIDEND factor. With PFE and several other giants this means timely and increasing DIVIDENDS paid over the life of ownership. For every BIDU there are many, many SONS to get caught in.... In these times traders (and investors) should stay with Dividend Paying, Share earning (not losing), meedium to large cap companies ONLY. Exception may be financials covered by TARP, which will not fail. Sorry M-FOOL, YOU are the fool this time!

  • Report this Comment On December 27, 2008, at 9:40 PM, H2Oasis wrote:

    i agree with "mktgeek". there are lots of free information out there that you can read and decide what to do. u don't someone else pick a stock for you. mir

  • Report this Comment On December 27, 2008, at 9:58 PM, Hoxsie454 wrote:

    I agree that its unlikely that any of these companies will become a ten bagger. They may become a two bagger. And, if we want some real upside action, we can hope that some of these messes will chop themselves into haves or quarters, which then might be good prospects, and provide the opportunity for real growth while paying decent dividends. If there is one lesson that this financial crisis has shown us again and again, it is that smaller is usually better!

  • Report this Comment On December 27, 2008, at 11:50 PM, moronpolitics wrote:

    If a stock pays me 4 or 5 percent a year in dividends and doubles in four years -- May God grant me a dozen such stocks. Motley I know not, but fool I agree.

  • Report this Comment On December 28, 2008, at 3:02 PM, frelges wrote:

    I agree w/mktgeek & those of like mind.

    I have been a new member for only a few days & it seems every link I click on that indicates useful info., is useless rambling & a pitch to subscribe to more rambling. I don't have time to wade thru all this crap to find some sound investment advice & helpful recommendations. Can't the Fool present some concise, non-brain damaging advice? I will give this Stock Advisor thing a fair shot. Not impressed so far!

  • Report this Comment On December 29, 2008, at 8:01 AM, wuff3t wrote:

    bidaskguru,

    You are of course entitled to your opinion, but please save the name-calling for somewhere else. These boards are supposed to be respectful and calling someone a "moron" doesn't really fit with that.

    As for the other comments that this article is only a tempter to draw you in to trying the Hidden Gems service - well of course it is! They're not going to publish the whole newsletter here. But the article is a short, easy-to-read pitch, and you're then offered a free trial during which you can make up your mind about the HG service. I don't see how they could be any fairer than that.

  • Report this Comment On December 29, 2008, at 9:04 AM, bonnie4101 wrote:

    I was a subscriber for a year and most of what I received were ads to buy other products. That is why I cancelled the subscription. Quite frankly, by the time the newsletter arrives you are getting "history" not "future" and that is not worth paying for when you can tune into the FNN and get much more for free.

  • Report this Comment On December 29, 2008, at 3:43 PM, FailingUpward wrote:

    If you canceled, why are you still trolling their forums? Obviously something here is useful to you...

  • Report this Comment On January 01, 2009, at 6:19 AM, luis18k wrote:

    Excuse my ignorance. What is FNN ?

  • Report this Comment On January 02, 2009, at 5:35 PM, babsys wrote:

    FNN is Fox news Network

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