These Will Be the Market's Next Big Movers

Lately, everyone from my best friend to the French woman who cuts my hair 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 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 if or where this dismal market will finally bottom out. Second, that anyone who tells them otherwise should be ignored.

And finally, that although he’s lost 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 Pfizer (NYSE: PFE  ) , Home Depot (NYSE: HD  ) , and Disney (NYSE: DIS  ) to see whether these companies are the kind of cornerstones around which they might want to build their portfolios.

Each has a rock-solid, world-renowned brand, has already weathered severe recessions, and will be around for decades -- yet each 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 solid dividend payers such as Qwest (NYSE: Q  ) and Eli Lilly (NYSE: LLY  ) .

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 paying out monster dividends and have major tax advantages over regular dividend payers.

Swinging for the fences
Of course, like me, most of the folks asking for my advice are on the younger end of the investor spectrum -- and for better or worse, they all want to know which stocks will 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. Finally, 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 Qualcomm (Nasdaq: QCOM  ) , Apple, or some oil and gas titan like Chevron (NYSE: CVX  ) 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 $76 billion, $124 billion, and $134 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 

5,900%

$218 million

Diedrich Coffee

574%

$100 million

Dendreon

392%

$2.5 billion

Insmed

389%

$129 million

American Dairy

318%

$671 million

Kirkland’s

292%

$193 million

Merge Healthcare

281%

$281 million

OncoGenex Pharmaceuticals

260%

$118 million

Cornerstone Therapeutics

260%

$130 million

Spectrum Pharmaceuticals

250%

$200 million

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 hotshots 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 its 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 it invests $250,000 of real 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.

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This article was originally published April 24, 2009. It has been updated.

Austin Edwards owns shares of Apple and Google. Apple and Disney are Motley Fool Stock Advisor recommendations. Magellan Midstream Partners is an Income Investor selection. Autoliv is a Hidden Gems recommendation. Pfizer is a Motley Fool Inside Value pick. The Fool is investors writing for investors -- and as always, we have a disclosure policy.


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