These Will Be the Market's Next Big Movers

Lately, everyone from my best friend to my barber has been asking me what I think they should do with their money.

You might think this signals that investor confidence is eroding even further -- but if anything, it tells me we might finally be approaching the end of this epic slide. You see, these are the same people who, up until about a month ago, would have much rather spent 30 minutes talking about socks than having to listen to me talk about stocks for even three minutes.

Suddenly, they're willing to give up Patriots season tickets and Caribbean vacations in order to get into the market -- and that shows me that people are finally starting to believe that buying stocks can build wealth again.

So, what am I telling them?
First off, that I'm no expert, and that there's no telling exactly when this dismal market will finally bottom. Second, that anyone who tells them otherwise should be ignored.

And finally, that despite losing his title as the world's richest man, I still believe in Warren Buffett and the process that made him rich -- buying great companies when they're selling at good prices.

That's why I recommend that people who don't own any stocks take the time to research stalwarts like Coca-Cola (NYSE: KO  ) , Wal-Mart (NYSE: WMT  ) , and Johnson & Johnson (NYSE: JNJ  ) to see if these companies are the kind of cornerstones they might want to build their portfolios around.

Each has a rock-solid, world-renowned brand, has already weathered severe recessions, and will be around for decades to come -- yet is selling at prices we haven't seen in years.

Even better …
I'm also a big fan of companies that pay you to own them, which is why I'm recommending that these folks look into steady dividend payers like Philip Morris International (NYSE: PM  ) and Kraft (NYSE: KFT  ) .

I've even gone so far as to introduce them to master limited partnerships like Kinder Morgan Energy Partners and Magellan Midstream Partners, which are currently paying out monster dividends (up to 9.6%) and have major tax advantages over regular dividend payers.

Swinging for the fences
Of course, like me, most of the folks asking my advice are on the younger end of the investor spectrum -- and, for better or worse, they all want to know which stocks are going to make them rich beyond their wildest dreams.

Again, I start by telling them that I'm no expert. Then I tell them that I think they should build a solid core portfolio before venturing on to riskier investments. Then I drop this pearl of wisdom on them: The market's next big movers are almost certainly small companies that they've never even heard of.

At first, they usually blow me off, arguing that Google, Apple (Nasdaq: AAPL  ) , or some oil and gas titan like ExxonMobil (NYSE: XOM  ) will surely be the next stock to blast into the stratosphere.

So, I explain that while all of those are great companies – and potentially good investments --they would have to pack on $94 billion, $110 billion, and $337 billion in market cap, respectively, just for their shares to double! Large companies can provide safer growth, but their size also places some limits on that growth.

Then I pull up a list of the top 10 percentage gainers of the past 52 weeks …

Stock

52-Week % Gain

Market Cap

HeartWare International 

5,093%

$221.67M

American Italian Pasta 

575%

$711.24M

Anadys Pharmaceuticals

333%

$195.76M

Kirkland's

305%

$95.83M

APAC Customer Services

284%

$172.66M

CardioDynamics

275%

$6.94M

TeleCommunication Systems

221%

$416.64M

Star Scientific

214%

$427.35M

Emergent Group

189%

$48.71M

Force Protection

184%

$332.59M

Source: Google Finance.

Notice anything?
Well, chances are you've only heard of one or two of those companies -- if any. Secondly, they are all small companies. And this is no isolated incident. Just take a look at the top 10 best-performing stocks of the past 10 years.

Now you can see why my Foolish colleague Ilan Moscovitz says small-cap stocks are the stocks Warren Buffett wishes he could buy, and why I tell everyone who asks that small caps are your shot to score big.

The nail in the coffin -- and your key to riches
Of course, along with being small and obscure, these stocks also share one other trait: They're completely ignored by the Wall Street hot shots who spend all their time covering big names like Apple and Google.

This means there is a much greater chance that the investing world misunderstands the true value of small caps -- giving you a shot to secure some amazing gains once everyone else begins to catch on. It's also exactly why Motley Fool co-founder Tom Gardner started Motley Fool Hidden Gems -- our signature small-cap investment service.

Among their more recent finds is Autoliv -- a Swedish manufacturer of seat belts, electronic safety devices, and airbags. Besides being a proven cash-flow generator, it sports an extremely shareholder-friendly management team that has turned it into the undisputed leader in its field.

Hidden Gems analysts Seth Jayson and Jim Gillies note that this is the kind of company that always commands a premium price -- which is why they think anyone trying to swing for the fences should take advantage of today's major discount.

If you'd like to see all the stocks the Hidden Gems team is recommending and follow along as they invest $250,000 of their own money in a portfolio of today's top small-cap stocks, I invite you to take a free 30-day trial.

All you have to do is click here. There is no obligation to subscribe.

Austin Edwards owns shares of Coca-Cola, Philip Morris International, Google, and Apple. Apple is a Motley Fool Stock Advisor recommendation. Coca-Cola and Wal-Mart are Inside Value picks. Johnson and Johnson is an Income Investor selection. Auloliv is a Hidden Gems recommendation. The Motley Fool is investors writing for investors -- and as always, we have a disclosure policy.


Read/Post Comments (21) | Recommend This Article (88)

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 April 24, 2009, at 1:19 PM, accelerando wrote:

    Know you guys are selling a product and do understand the idea -- in fact made a ton of money once-upon-a-time buying "Rule Breakers" companies.

    However. This is not the buffet philosophy. Which could be summed up as saying find one or two or three great companies that are selling at discounts to their actual value and put ALL your money into those companies.

    Which is easy in todays world. You can be adventurous and put every penny into apple, the best company that capitalism has so far spawned selling at an absurd 12 or 13x expected cash generation. (15.5x analyst consensus which has been 20-40% short EVERY year for quite some time. And please, of course, disregard the silly gaap numbers which in no way reflect the power of the company)

    Or you can divide your money between apple and the second best company in the world, google.

    Of course this is an extremely aggressive approach, fraught with risk as whotf knows what is actually going to happen.

    But in terms of risk/reward there isn't a better way to go.

  • Report this Comment On April 24, 2009, at 5:50 PM, 7footmoose wrote:

    stock appreciation does not automatically equate to a company that cries for my investment dollar, TCS is a company which has been around for nearly 20 years, they produce a product which is integral to wireless communication and is widely used by wireless providers including Verizon, management seems to be qualified and consistent, they just do not make any money, for most of the last 15 years they have existed by issuing additional shares of stock to raise the funds to continue operating, I wish them well and I hope TCS ultimately makes more than the insiders a lot of money but I do not feel it is a great stock play

  • Report this Comment On April 24, 2009, at 6:24 PM, OracleOfMass wrote:

    What is this company Heartware?? The symbols that come up do not seem like they have gains anywhere close to the 5000% referred to herein??

  • Report this Comment On April 24, 2009, at 8:32 PM, BigOlDave wrote:

    Give us tickers! A list of names w/o symbols is hard to research ...which is what TMF is supposed to be doing,

  • Report this Comment On April 24, 2009, at 8:52 PM, TMFAEdwards wrote:

    7footmoose...

    I was not commenting on TCS specifically, simply pointing out that the market's biggest movers tend to be small-caps.

    OracleOfMass...

    Here is a chart of Heartware from Yahoo! Finance... http://finance.yahoo.com/echarts?s=HTWR#symbol=HTWR;range=6m

    BigolDave...

    Autoliv's ticker is NYSE: ALV. Unfortunately, we are only able to ticker a certain number of companies in each article.

    MF Caps research on this company can be found here: http://caps.fool.com/Ticker/ALV.aspx

    Yahoo! Finance Research can be found here: http://finance.yahoo.com/q?s=ALV

    If any of you have other research tools/sites you use, please share. Otherwise, thanks for reading, best of luck, and Fool on!

    Cheers,

    Austin

  • Report this Comment On April 24, 2009, at 9:05 PM, CaptDLight wrote:

    Don't overlook these two:

    1. iRobot (IRBT) see todays story on Motley Fool...

    2. For those of you that might also dabble in penny stocks (!), read up on Aria International (http://www.aria-int.com), They are currently trading under ARAHE.OB (or by the time you read this, perhaps it will be ARAH.OB again) which just took a shell over from TRIH. I'm looking for them to double their current price (within the month) when the required reports are made public by their new accountants!

  • Report this Comment On April 24, 2009, at 9:17 PM, TMFAEdwards wrote:

    CaptDLight... thanks for the post. I'll look into both.

    And now a challenge to everyone else...

    Please post the name and ticker of the small-cap (or obsure stock) you think will be the market's next big mover. More importantly, tell us WHY you think it's a great investment.

    I think if enough of us post, we can build a really solid list small-cap watchlist. Give me 5 -10 solid stocks/pitches and I''ll post another article with everyone's best ideas.

    Fool on!

    Austin

  • Report this Comment On April 24, 2009, at 10:41 PM, exseries7 wrote:

    Okay, I’ll take TMFAEdwards’ challenge for highlighting a small/micro cap: Lakeland Industries (LAKE). They manufacture a wide variety of technologically advanced protective clothing that saves lives and protects workers both in private and public employment from fire, hazardous chemicals and diseases throughout the world.

    I like them because of their fundamentals: P/E of 7 while trading near their 52-week lows, Price to sales of .33 (MRQ), Price to book of .49 (MRQ), Quick ratio of 2.86 (MRQ), current ratio of 10.52 (MRQ), and Total Debt to Equity of 38.7 (MRQ).

    They are rapidly but prudently expanding across the globe by acquiring Qualytextil S.A, and establishing factories China and India, while also keeping their design and manufacturing facilities in the U.S. They seem well-positioned in their diversity of their product lines and production facilities and markets, and may do well regardless of the dollar fluctuations.

    Perform your own due diligence because I don’t have any particular expertise, and traded my Series 7 license for a teaching credential two decades ago.

  • Report this Comment On April 25, 2009, at 12:11 AM, miself238 wrote:

    ok everithing is fine but can somebody explain the overnight period? some stocks are down one day and the company reports ernings at 6.00 pm, and the next day the stock went up 15% ??????.

  • Report this Comment On April 25, 2009, at 1:53 AM, paultaut wrote:

    The rest of the World is open while you sleep and then there is Pre and Post market trading.

    News comes out before or after the market closes, and if enough people know it, the market open bidding can be fierce, either Up or Down, the tradung is electronic and occurs whether you broker is at work or not. You've seen the ads, even a Baby can do it.

    Check with your broker if you can participate, if not, find some Firm that allows this.

  • Report this Comment On April 25, 2009, at 5:39 PM, TxTom wrote:

    The market's next big movers are the stocks already in play but have just begun to move. Laugh if you want, but I've realized gains of up to 300% on BAC, C, FITB, WFC, ETFC, and several others in the sector. These aren't yet anywhere close to where they will be in another three months. The economy doesn't recover until the financials recover, and the major financials are back-stopped by the federal government. This is called "reward without risk", and as much as I may not like for our government "owning" our financial institutions, I certainly like the profits from trading them.

    Next after financials - well tech of course. That rally is just starting. Meanwhile I'm watching for major gains from traditional dogs like STEM and SIRI. And they will come. Happy investing, everyone. This is the opportunity of decades!!! Don't miss it.

  • Report this Comment On April 26, 2009, at 11:00 PM, IRABound wrote:

    I see much more movers than just mentioned. I'm a big Buffet fan...the man didn't get where he is without knowing what he's doing. I've purchased when low Godman Sachs (GS), General Electric (GE), Vulcan Materials (VMC) and Eaton (ETN).

    The market will come back and when it does, I don't want to miss the earnings!

  • Report this Comment On April 27, 2009, at 9:01 AM, madmilker wrote:

    tat will happen when the people in He!! are drinking ice water.......

  • Report this Comment On April 28, 2009, at 2:31 AM, KidWonder13 wrote:

    TxTom...

    About the Banks... while it is true the economy may not recover until the banks do, how much would you have bet on WaMu, or Lehman, which could have easily cancelled your 300% and then some? The big problems with the banks is the TARP money that has to be paid back. You are better off picking a solid bank that didnt accept TARP... I have taken profits off the boards too with the bank stocks, WFC, C, and BAC... but these stocks are nothing more than speculative right now... There is going to be a lot of legal tape to get through and some of the banks may not survive (Wamu didnt, and they were the largest lender!). My favorite bank is UMPQ right now. I got them just hundreths of points off the 52-wk low and they have not seemed to have quite the volitile swings that the banking industry has had (since the big meltdown). Its the only bank stock I have stuck with.

    I have to agree with IRABound, I also own ETN, GE and GS all purchased near 52-week lows. Most of the banks are just too risky right now, especially given the power of negative propoganda and the trading power of ETF's.

    I'm happy with taking my dividends and hedging my portfolio with those. Now is the time to invest in strong companies that you know will pull through (AAPL, GOOG...again, both of which I have). Why speculate when you can get a strong company at a huge discount; you are banking on a strong government program to salvage a broken financial system. In case you havent seen our governments budget lately, its not real promising either!

    The real problem with the financial sector is people overextending themselves. There is no "band-aid" for stupidity.

  • Report this Comment On April 28, 2009, at 9:58 AM, XMFCams wrote:

    Ok, The Kid, here's my favorite small cap - Bare Escentuals (BARE). It's a cosmetics company trying to rewrite the way women care for their faces. I bought shares for my sister to hold as a way to introduce her to the stock market.

    Mkt cap on BARE is 550M, PE: 5.75, Revenues were up last year despite analysts gloomy predictions.

    BARE is up against some established competition, but I like their drive to shake things up (mineral makeup, infomercials). Sure, others can respond to these moves, but when a company keeps innovating successfully it eventually gets the rest of the industry by the short hairs - and investors reap the benefits.

  • Report this Comment On April 28, 2009, at 12:43 PM, hooooon wrote:

    how about MYST, google china's cloud partner. everyone seems scared of china though, so it trades at a PE of 2.5 despite huge growth and profits in one of the fool's favorite growth industries. is china that scary?

  • Report this Comment On April 29, 2009, at 10:41 AM, theincidentalist wrote:

    Kid A,

    Another fantastic article.

    An interesting place to find small caps (that were recently mid caps) is in cyclical industries like energy, commodities, and shipping.

    I like Dryships (DRYS) because they are getting hammered like all shippers from the bubble bursting in shipbuilding and maritime trade, and are trading at bankruptcy levels. But Dryships has diversified into an offshore oil rig owner/operator which gives them entry into a lucrative field. Petrobras just inked a $630 million dollar deal for one of their rigs, and Petrobras has stated they are looking for more rigs in the next 3 months. DRYS has 4 rigs coming online and no other rigs will be finished in the world before theirs. Here is why I think this is really smart -

    http://www.fool.com/investing/small-cap/2008/11/14/the-new-o...

    A contracting economy has shuttered demand for things like oil and natural gas. I like a ''bottom'' call here in natural gas, and love the new Atlas (ATLS), which will soon be a mid cap once nat gas prices rise and they take over their exploration MLP Atlas Energy Resources (ATN).

    In cyclical industries, look for small caps that used to be much bigger, a solid and entrenched business model tied to a resource industry, and they will soon be mid caps again.

    Disclosure- I own ATN and DRYS

    Matt Hoffman

    theincidentalist@yahoo.com

  • Report this Comment On May 01, 2009, at 10:47 AM, WidowNash wrote:

    As a recent widow, I am new to the challenge of the stock market. That was my husband's delight and I was not interested. By necessity, I started learning; 2008 losses were only 15% and to date I am up 3.2% so I am managing.

    Two small caps I own are pink sheet ZNNMF, an electric car company in Canada, and COIN, an organic fertilizer company that recycles food waste to make its fertilizer. ZENN is special in that it has an interest in EEStor, a secretive R&D firm in Cedar Park Texas that has developed an ultracapacitor from common materials, capable of powering the ZENN EVs for over 300 miles with minimal charging time. The applications are huge across all disciplines - imagine no cords on appliances - but EEStor has yet to deliver the final product to ZENN. Try wikipdia for more specific info.

    COIN is a tug at my left coast recycling nature. Granted the competition is stiff but the concept is beautiful - recycle industrial amounts of food waste into a superb organic fertilizer. The have recently placed product in a number of outlets, including Home Depot.

    I am not educated yet about all the numbers, and they might be really bad, but these two might be worth your while to investigate.

  • Report this Comment On May 01, 2009, at 9:23 PM, peters46 wrote:

    KidWonder13, you may want to reconsider recommending UMPQ. OR now has the second highest unemployment rate in the US. Both UMPQ and STSA (Sterling Savings Bank) are local players in the upper NW, and I expect both of them to be hit hard by loan-loss reserve requirements, and actual losses that will dwarf (percentage-wise) their larger relatives BAC and C.

  • Report this Comment On May 01, 2009, at 10:13 PM, jbrt wrote:

    yesterday you were knockin' Buffett , and here it is today your recommending a company he owns apprx. 7% of KO " whos on first ? , whats on second ? "

  • Report this Comment On July 20, 2009, at 6:11 PM, RiverRover wrote:

    KidWonder 13, Umpqua is a sell right now on TMF.

    TMFAEdwards, it's easy to find a stock that's mentioned in an article. Just enter the full name in the search line at top of screen. Articles will appear and then the ticker symbol is displayed.

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