These Stocks Can Always Outperform

David slaying Goliath. The Greeks defeating the Persians. Harry Truman's victory over Thomas Dewey.

History is full of stories in which the underdog comes out on top.

But it's not just the stuff of tall tales. In fact, the conclusion of a recent New Yorker article by renowned author Malcolm Gladwell is that these upsets are much more common than we realize.

As with stocks
The characteristics that, according to Gladwell, help an underdog defeat a "stronger" opponent are identical to those that lead certain stocks to outpace others:

  1. They're small.
  2. They acknowledge their potential weaknesses.
  3. They're unknown and able to adopt revolutionary strategies that are more effective. Thus, they're able to overtake even the largest of competitors.

Gladwell cites scholar Ivan Arreguin-Toft, who calculates that when underdogs possess these qualities, the probability of their emerging victorious skyrockets from just 28.5% to 63.6%.

In effect, the situation completely reverses and the underdog becomes the odds-on favorite.

These same characteristics also help make winners of small-cap stocks -- which most Wall Street analysts and institutional investors routinely overlook simply because of their small stature.

By way of an example
Let's look at one company that fully embodied those three characteristics when it had its IPO a mere seven years ago:

  1. Its initial market capitalization was just $241 million.
  2. It was an online company, up against a competitor that had a physical presence with nearly 8,000 U.S. stores and worldwide revenue of more than $5 billion.
  3. It was committed to making the experience of renting movies as painless and easy as possible -- with revolutionary ideas like eliminating notorious late fees, allowing customers to keep movies as long as they wanted, and allowing the "wisdom of the crowds" to recommend movies.

That last clue probably gave it away, but in case you didn't catch it, the company in question was Netflix.

Although its IPO went for $241 million in 2002, this David is now slaying the Goliath Blockbuster and has a market cap of more than $2.5 billion. And this is just one instance in which the agility that comes with being small helps a tiny company overtake larger competitors.

Size as strength
So companies who embrace their petite size really have a tremendous, yet often ignored, advantage over their competition.

But what's really important for you and me as investors is how much money we could make from an investment. We want stocks that can easily double or triple our money -- or more.

And, again, it's small-cap stocks that have the obvious advantage. Think about what it takes for a business to grow 10 times in value:

Company

Current Market Cap

Market Cap After Tenfold Increase

Future Market Cap Roughly Comparable Today To ...

Intel (Nasdaq: INTC  )

$104 billion

$1.0 trillion

Nominal 2008 GDP of Australia

General Electric (NYSE: GE  )

$123 billion

$1.2 trillion

Nominal 2008 GDP of India

Apple (Nasdaq: AAPL  )

$135 billion

$1.4 trillion

Nominal 2008 GDP of Canada

Palm (Nasdaq: PALM  )

$2 billion

$20 billion

Freeport-McMoRan (NYSE: FCX  )

TiVo (Nasdaq: TIVO  )

$1 billion

$10 billion

Alcoa (NYSE: AA  )

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

This inherent potential of small caps to double over and over again is the reason they have consistently been the top-performing stocks of the past four years.

And the greatest part is that they make the best stocks to own right now, in this volatile market.

That's one reason our Motley Fool Hidden Gems advisors have outperformed the market by an average of 16 percentage points since the newsletter's inception six years ago. You can see all their recommendations -- and follow along as they invest a cool quarter-million of the Fool's cash in a real-money portfolio -- free of charge for 30 days. Click here for more information.

Adam J. Wiederman owns shares of General Electric but of no other company mentioned above. Apple is a Stock Advisor recommendation. The Fool's David disclosure policy always slays disclosures on Goliath websites.


Read/Post Comments (5) | Recommend This Article (37)

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 July 21, 2009, at 4:38 PM, plange01 wrote:

    the only way GE can outperform is if you buy it short! this is a future $3 stock!

  • Report this Comment On July 21, 2009, at 5:28 PM, Aidala wrote:

    Please cancel my trial subscription. Tom Aidala

    Tommaddy @aol.com

  • Report this Comment On July 22, 2009, at 10:17 AM, plange01 wrote:

    even with the US sinking deeper into a depression boeing is still doing well! when the economy eventually changes this stock will triple from its current price...

  • Report this Comment On July 24, 2009, at 9:23 PM, VegasMartin wrote:

    Any recommendations on Small Cap stocks to start looking at?

    www.ShootTheBears.com

  • Report this Comment On July 25, 2009, at 4:45 AM, a264245 wrote:

    You appear to be offering services under a number of different subscriptions as follows:

    1. "Inside Value"

    2. "Stock Advisor" selection.

    3. "Hidden Gems"

    4. "Income Investor"

    Does one subscription cover all picks from these areas, or does one have to subscribe to each seperately, and if so what is current cost of each?

    Finally please explain what the difference between the services provided under 1 to 4, if any!

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 946092, ~/Articles/ArticleHandler.aspx, 11/23/2014 6:27:11 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement