The Home Run Stock You're Too Afraid to Buy

Do you remember when you tried your first beer because everyone else was doing it? Are you the type who sees all the big movies on opening weekend so you can talk about them at work on Monday morning? Or maybe you bought Citigroup (NYSE: C  ) or Bank of America (NYSE: BAC  ) in late 2006 because housing was doing awesome and those companies were rolling in the money? Humans are social animals, but that impulse to be part of the crowd is destroying your chance to find the next home run stock.

"Don't look dumb"
Michael Lewis, the author of Liar's Poker, is one of the great raconteurs of business tales. While he's dismantled Wall Street in his firsthand account of life as a trader, he's also probed the cozy world of baseball in the more recent Moneyball. In this latter book, he explores why the Oakland A's -- one of the lowest-budget teams in all of baseball -- suddenly became one of the winningest around the turn of the 21st century.

The team didn't do what everyone else was doing. It defied conventional wisdom with a unique process:

  1. By working with experts, the team's otherwise-emotional general manager, Billy Beane, implemented a new, scientifically based means to evaluate talent.
  2. The general manager had to implement his system even though all his talent scouts -- and most of the entire league -- thought the method was useless.
  3. After snapping up his new talent at low prices because no one thought the players were good, Oakland suddenly began to dominate the league, even though it had one of the lowest payrolls in the country.

The secret?
Sure, the system was good. But the scientific basis had been around for a couple of decades. In fact, the developers of the system had to practically beg baseball teams to use it. Until Beane came along, baseball teams continued to do what they had always done, because it was safe. No one would criticize you if you bought what everyone else was buying. The real secret, Lewis confides, is that Beane had the courage to look dumb if his system didn't work. It's much easier to do what the crowd does and fail than it is to do something different and succeed.

And what held major league teams back for decades is what's holding many investors back from the next great stock. They're afraid to look dumb. That's it.

All greatness comes from the contrarian
Oakland's contrarian streak is what led it to success. That's exactly the approach that the experts at Motley Fool Hidden Gems use when evaluating a small-cap investment. And it's what Hidden Gems co-advisor Seth Jayson told CNBC when he discussed investments with the talking heads: He's not afraid to pick the great stocks that no one's heard of.

Superior investments are found where no one else is looking. That means that you and your friends have probably never heard of the big winner of the next decade. Who had really heard of Hansen Natural (Nasdaq: HANS  ) 10 years ago? It was a $53 million company then. Since that time, this purveyor of Monster energy drinks has become a $3 billion behemoth. That's 48% average compound growth. You simply can't find that kind of growth if you buy the "smart" stocks that everyone knows, the Coca-Colas (NYSE: KO  ) and McDonald'ses (NYSE: MCD  ) of the world. They'll never grow that fast again.

Hansen Natural wasn't just some lucky story; it had great execution even back then. In 1999, the company sported attractive metrics such as a 28% return on equity and a 26% return on capital. But who had heard of it? The world was enthralled with dot-coms that subsequently went bust. 

If you didn't own one of the New Economy businesses, you were a fool, since they would grow forever. Even super-investor Warren Buffett was laughed out of town for refusing to buy what the crowd was snapping up. But years after the dot-com bubble burst, Buffett is as wealthy as ever, while those who followed the fashion are bust.

Here are some lesser-known small caps that today have the same high returns on capital and equity that Hansen had before its big run:

Company

Market Cap

P/E Ratio

Return on Capital

Return on Equity

PRG-Schultz International

$113 million

6.4

38%

82%

Cherokee (Nasdaq: CHKE  )

$178 million

13.2

52%

54%

Buckle (NYSE: BKE  )

$1.2 billion

10.8

28%

30%

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

Small is beautiful
The expert analysts at Motley Fool Hidden Gems look exclusively for the market's overlooked small-cap stocks. That's where you're going to find the next great home run stock -- if you're like Billy Beane and Warren Buffett and not afraid to go against the crowd.

If you'd like our experts to help you find superior small-cap ideas, you can check out all of our Hidden Gems stock research, as well as our eight "Buy First" small caps for new money now, free for the next 30 days.

Click here for more information.

Already a Hidden Gems subscriber? Log in here.

Fool contributor Jim Royal owns Bank of America. Not the whole thing, just a few shares. Hansen Natural is a Motley Fool Rule Breakers selection. Coca-Cola is an Inside Value and Income Investor selection. The Fool has a disclosure policy.


Read/Post Comments (37) | Recommend This Article (167)

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 September 03, 2009, at 4:20 PM, ozzfan1317 wrote:

    JSDA Jones Soda company no debt solid brand used to be a 30 dollar stock. If they can take some market share and turn profitable a ten bagger could be had worth a closer look in my opinion.

  • Report this Comment On September 03, 2009, at 4:38 PM, Ramosrg wrote:

    LVLT Level 3 Communications has the potential to be acquired by a Big Player looking for more Bandwidth or has a bright upside due to Broadband Stimulus. Just my 2 cents.

  • Report this Comment On September 03, 2009, at 5:29 PM, spinindog wrote:

    Buckle the next Hansen? Not a chance. Their stores are already in every mall that they could possibly succeed in. Their only move from this point is into malls that would be less profitable. Monster drinks are successful because they have been crammed into MILLIONS of stores around the country. You don't cram an entire retail clothing store into more than a few thousand locations. Buckle could go up some, even double, but it's not going to grow much more at this point.

  • Report this Comment On September 03, 2009, at 5:58 PM, foxboropatsfan wrote:

    Hopefully HG will do better than Billy Beane has done with Oakland. Beane took over in 1998 and although the A's got into the division playoffs from 2000-2003 they lost in the first round each time. In 2006 the won the first round only to be swept by the Tigers in four. that is the extent of the A's "success" during the "Moneyball" era of Beane. Never made it to the World Series and never won the ALCS.

  • Report this Comment On September 03, 2009, at 6:22 PM, kappermi wrote:

    But if you compare Beane to the Cincinnati Reds or the Pittsburg Priates, who average 30,000 empty seats a home game he is a fantastic success.

  • Report this Comment On September 03, 2009, at 6:42 PM, 102971 wrote:

    What's the point of suggesting PRG-Schultz when I can't find it listed anywhere?

  • Report this Comment On September 03, 2009, at 8:57 PM, gilligan2 wrote:

    The numbers for these stock are nice, but which stock was your recommendation in 1999? The numbers you present are from established data. How successful are you at picking a stock for the present and future?

  • Report this Comment On September 03, 2009, at 9:35 PM, TMFDiogenes wrote:

    Hey 102971,

    It's listed on the nasdaq under the ticker prgx.

    gilligan,

    Hidden Gems began in 2003. It's picks are beating like amounts invested in the S&P 500 by 17 percentage points on average over that time frame.

    Thanks, all, for reading,

    Ilan

  • Report this Comment On September 03, 2009, at 9:48 PM, DownEscalator wrote:

    BIlly Beane's Oakland A's are in LAST PLACE right now, a time when his farm system should be coming to bloom and dominating the team. Michael Lewis' Moneyball has been absolutely smashed and discredited. Anyone who still claims there's something to that book is either dumb or a businessperson looking to make some noise.

    Last season, the As won 75 games with a payroll that rivalled that of the Devil Rays, Twins, Orioles, and Rangers. They only did better than the Orioles, and the Devil Rays went to the World Series on a few dollars more in budget.

    This season, the Twins, D-Rays, and Rangers are all better again, and the Orioles have better young talent.

  • Report this Comment On September 04, 2009, at 12:10 AM, ohelll wrote:

    ozzfan1317 JSDA! If I recall correctly Jones Soda JSDA. After reading an article on jsda and doing some further checks it was around $10. Thats right $10 not 10 cents at a big ratio of earnings. After a few more articles I stopped reading that source. Now, JSDA is at 71 cents and still makes a loss. It seems to have more cash on hand now and a tiny amount of debt but what is its current rate of burn (a term more used in biotech)? Answer: about $2m with $7m cash on hand, the ratio looks great but will it ever make its losses back. The losses are slowing but...

    If you can see a ten bagger good luck!

    I only lost half of my investing stake on something else instead so I don't believe I am brilliant at this investing thing but I was a real sucker wasting time researching that one.

  • Report this Comment On September 04, 2009, at 4:37 AM, 8Lives wrote:

    Why C and not CIT? What causes the difference in their prices? Is C really just that much more stable of an equity?

  • Report this Comment On September 04, 2009, at 9:12 AM, DoWeUnderstand wrote:

    C is going to be here for the long haul. I have 61% profit in it now and I expect it to go move up to between 10 and 12 dollars by the end of the year. Where the government has put their money is where the short term and long term profit is going to come from. I expect Citibank to do very well in the future.

    So far Motley Fools has really missed the boat on this one.

  • Report this Comment On September 04, 2009, at 11:26 AM, mrevspara1 wrote:

    PRG Shultz is listed on NASDAQ

    Stock Quote

    PRGX (Common Stock)

    Exchange NASDAQ (US Dollar)

    Price $5.39

    Change (%) 0.21 (4.05%)

    Volume 47,712

    Data as of 09/04/09 10:58 a.m. ET

    Minimum 20 minute delay

    Refresh quote

  • Report this Comment On September 04, 2009, at 1:37 PM, jehargro wrote:

    Its funny how people over look one of the most "Clean Energy Stocks" that is going to run the future just like the other companies in california. Come banking collapse, Heres a Gem, if fool doesn't delete this comment . "KEPI"

  • Report this Comment On September 04, 2009, at 1:51 PM, ScottRichard wrote:

    I had a bad experience with a company in which over 50% of the shares were held by insiders. The executives kept raising their salaries and bonuses to bleed off any profits. Your thoughts on PRGX insider holding risks?

  • Report this Comment On September 04, 2009, at 3:15 PM, MORK000 wrote:

    GOOD GOING (102971) POINT WELL TAKEN! WHAT'S PKG-SCHULTZ INTERNATIONAL?

  • Report this Comment On September 04, 2009, at 4:22 PM, 102971 wrote:

    Thanks TMF Diogenes!

  • Report this Comment On September 04, 2009, at 5:07 PM, wrkdiver wrote:

    T

  • Report this Comment On September 04, 2009, at 5:10 PM, wrkdiver wrote:

    Another MF sales pitch! Sooo o o..... WHAT I THE STOCK AND WHY ARE WE TOO AFRAID TO BUY IT?

  • Report this Comment On September 07, 2009, at 11:42 AM, simzilla wrote:

    scld watch and smile

  • Report this Comment On September 09, 2009, at 4:39 PM, whatsyourgame wrote:

    I don't believe that your are in the advisory business. I belive that your real business is selling services.

  • Report this Comment On September 11, 2009, at 3:31 PM, recgraph wrote:

    I was a Hidden Gems subscriber for about six years. Not once during that time was Hansen Natural recomended. I lost my shirt with their four time recommendation of Select Comfort. In fairness, I must say that I do use and appreciate the CAPS service which is free.

  • Report this Comment On September 11, 2009, at 3:45 PM, kbynot1 wrote:

    Jehargro appeared to write about "KEPI" but I can't find that symbol anywhere. It's also not on his CAPS list. Is there a KEPI ?

  • Report this Comment On September 11, 2009, at 4:05 PM, civilwargeneral wrote:

    Yes! A Kepi is the cap worn in the Civil War.

  • Report this Comment On September 11, 2009, at 4:23 PM, marcfool100 wrote:

    As far as natural beverages are concerned with some potential upside, I own shares of Reed's inc, a $2.00 NASDAQ stock with a pretty decent product line that is widely distributed. Should be acquired someday in the distant future.

  • Report this Comment On September 11, 2009, at 5:19 PM, YingandYang wrote:

    Verenium (VRNM)

    250 issued patents and more than 350 patent applications.

    “Verenium is the first publicly traded, fully-integrated, next-generation biofuel company.

    Enable the production of low-cost, biomass derived sugars for a number of major

    industrial applications, including the commercialization of advanced biofuels. Investors include Syngenta, AWM

    Investment and Health Care Ventures. Verenium trades under the VRNM symbol on NASDAQ.

    Model: The key elements of our corporate strategy are to develop integrated solutions for the emerging

    cellulosic ethanol industry for use in production facilities that we own and operate, individually or jointly with

    partners, as well as those of third-party licensees. We intend to use our leadership position to develop novel,

    high-performance enzymes and to advance our technology and process development capabilities, together

    with BP, at our pilot and demonstration-scale plants in Jennings, Louisiana, and our first planned commercial

    facility in Highlands County, Florida, to exploit opportunities in the developing market for the production of

    cellulosic ethanol. We have established our business model based upon the belief that owning and managing

    cellulosic ethanol production facilities in conjunction with strategic partners, including BP, will allow us to

    create economic value by incorporating our scientific and engineering skills into the production facilities.

    Through our joint venture with BP, we may also license our proprietary technology to extend our commercial

    reach and accelerate our market penetration.

    Past milestones:

    1. Verenium begins commissioning nation’s first-of-its kind cellulosic ethanol demonstration plant in Jennings,

    Louisiana;2. Verenium announces plans to build first commercial cellulosic ethanol plant in Highlands County, Florida,

    with a target capacity of up to 36 million gallons per year (MGY);

    3. British Petroleum (BP) and Verenium form 50-50 joint venture (JV) to develop and commercialize cellulosic

    ethanol from nonfood feedstocks in the United States; JV now operates under the name Vercipia Biofuels

    Future milestones:

    1. Secure financing for first commercial-scale cellulosic ethanol facility in Highlands County, Florida. Vercipia Biofuels, the 50-50 JV company between BP and Verenium, intends to break ground on one of the nation’s first commercial-scale cellulosic ethanol facilities in Highlands County, Florida, in 2010. This 36 MGY facility is expected to begin commercial production in 2012. Vercipia anticipates developing additional commercial facilities in the Gulf Coast region and expects to announce the location of its second plant in the coming year.

    2. Leverage R&D capabilities and enhance cellulosic ethanol capabilities;

    3. Pursue strategic partnership opportunities for the Specialty Enzyme Business Unit

    Verenium’s process technology has also been licensed to Tokyo-based Marubeni Corporation and Tsukishima Kikai Co., Ltd. and incorporated into their 1.4 million liter-per-year cellulosic ethanol plant in Osaka, Japan – utilizing construction and demolition wood waste as a feedstock.

    Verenium quotable quotes:

    “Verenium is the first publicly traded, fully-integrated, next-generation biofuel company, and its range of expertise and resources greatly enhances its potential for success. Verenium is mastering the entire cellulosic ethanol production process as the first and only company with the full range of “field-to-pump” capabilities. This includes: growing energy crops, developing enzymes, processing biomass into fuel and, ultimately, selling it. Additionally, Verenium’s partnerships, which range from industry giants like BP and Syngenta to the U.S. Department of Energy (DOE), make the company uniquely positioned for success.

  • Report this Comment On September 11, 2009, at 6:28 PM, yaldezian wrote:

    Oakland A's as a company are a good value team, they are competitive, usually in the running for a playoff spot, and a very low payroll.

    BUT, they are NOT a dominate team, not like the Red Soxs or the Yankees (2 of the very highest payrolls) in terms of winning championships.

    Go for value, the A's / want a championship the forget about it.

  • Report this Comment On September 11, 2009, at 8:10 PM, joshuashaw wrote:

    On September 04, 2009, at 5:10 PM, wrkdiver wrote:

    Another MF sales pitch! Sooo o o..... WHAT I THE STOCK AND WHY ARE WE TOO AFRAID TO BUY IT?

    Exactly! The Fool is no different than any spam email, except that they have loyal followers. They are a double edged sword. 1. You pay them for the info 2. They are in on the ground level and then tell you how hot the stock is. You're going to get cut. FTC? Hello?!? Are you there?!? How long has it been since the brokers got busted for this?

  • Report this Comment On September 12, 2009, at 12:53 AM, swkwie wrote:

    i concur with "DoWeUnderstand" that Citigroup will recover to reward every investor who got burnt investing in this giant behemoth during the subprime crisis (sadly i am one of them). Give your support to realize my dream.. it's a beautiful thing to do, for the good of all. Cheers !

  • Report this Comment On September 12, 2009, at 7:24 AM, foolshand wrote:

    WHERE IS THE HOME RUN?

    how can i purchase this fools stocks at 22 and 28 dollars and expect to be hitting a home run?

    i would consider it a base hit, but not a home run.

    what i would consider a home run to be, well you know, a ball that's knock out of the park.

    a ball that flys over the fence and everyone stands up and screams. you know, when the fireworks go boom in the air, now thats a home run!

    so since this motley fool writes another catchy headliner to draw everyone in to his artical only to let us down once more with his foul ball. i will take it upon my foolish pitch to give everyone a few home runs.

    .

    i call it my piggy bank stocks.

    i call it this, because i'll take some extra profits from time to time of another sell and buy more of these stocks and maybe one day, i will hear the crowd ROARRRRRR ! the fireworks, go BOOM! or maybe i'll just stand up and dance around my chair, high fiving myself.

    now that's what i call a home run.

    i will make the statement do your own research.

    i do own all this stocks and always buying more.

    enough of the talk, here are my home runs .

    UTRM, why? just think of possability. the armies of the world. the relief disaster angencies, red cross, bad water or no water, you and me.

    this ball game is about to start where the pitcher and the catcher are warming up.

    number two is AMNE, why? going green the big deal of today talk and every little bit helps.

    saving energy. here is a company that will do just that in every home and any building and we are not talking just a few saving dollars.

    maybe one day the umpire will make it mandatory on every building. but for now, i'm just counting the number of truck start ups.

    my number 3 will be MLKNA, why? the bigest talk of the year is health care. healthcare this, health care that.

    today we live in a techo world and every day some new gaget or app has been develop , just take a look at cypress semiconductors CY, you can read some new development every day.

    the cost cutting for health care will be from people power to computer, just like the robots in the automotive plants way back when.. i not talking about robotic doctors, which by the way they do have, i'm talking about the information part of the business, so this is where MEDLINK comes in to play.

    MEDLINK, what a name, don't you agree? it's has that special ring to it, like the NewYork Yankeys.

    well, time will tell if this player gets drafted into the majors or just sells its name..

    the pitcher has been pitching and the score has stayed the about the same, down .10 up .10.

    well there are my balls in play for what i call a real home run hit.

    good trading all

  • Report this Comment On September 12, 2009, at 9:56 AM, VegasMartin wrote:

    Look out for ZIXI. The stock just jumped from $1.80 to $2.20 in about 2 weeks. They do ePrescriptions and eMail encryption of sensitive financial and medical information. As the health care debate heats up, so is this stock. They will be a big beneficiary from health care reform. Don't miss the next move up, this stock will be at least $4 a year from now.

    http://www.ShootTheBears.com

  • Report this Comment On September 14, 2009, at 9:08 AM, G2Services wrote:

    Motley always has the hype with their articles. As with any other service you have to do your own research. They tend to like to blow smoke up their own bum, but so does Cramer.

  • Report this Comment On September 16, 2009, at 6:19 PM, Daveoffv wrote:

    I think you shouldlook at what Oakland A's have done lately before you continue to use them as an example of success in business.

  • Report this Comment On November 12, 2009, at 4:46 PM, Montereyjackson wrote:

    Philip A. Fisher's book, Common Stocks and Uncommon Profits, is a good read on this subject. It indicates where not to look, which is helpful too.

  • Report this Comment On January 19, 2010, at 7:05 PM, stan8331 wrote:

    The Oakland A's are a victim of their own success. Once other teams started seeing them win with that strategy, compunctions against using those methods eventually went out the window and so did the advantage the A's had generated for themselves.

    I think the bottom line is that it's very difficult to generate out-sized returns if you're doing what everyone else is doing. I first try to look for things that work. I mean, buying high and selling low certainly is a contrarian strategy, but it's unlikely to yield good results. :-)

    Beyond that, I look for ideas that run at least partially counter to prevailing wisdom. These days you hardly need to walk three feet to find someone who'll tell you that frequent trading is the only way to make money in the market. Trying to beat Goldman-Sachs at their own game seems like a tough row to hoe for me - I'm very partial to investing ideas that DON'T depend on any sort of genius on my part...

  • Report this Comment On February 05, 2010, at 5:22 PM, theSavageVisitor wrote:

    Fear of losing money happens when a trader first initiates a position and immediately sees the trade go against him/her. At this moment, beginners in the stock market (who normally do not trade according to some predetermined rules) will often second guess their decision. Intense fear of losing can cause the trader to immediately 'cut loss' and exit the trade, at a small loss. These losses, though individually small, can quickly add up to a significant amount. Over time, such losses can cause the trader to lose his/her morale and confidence.

    To overcome fear of losing, I remind myself that a surgeon spends more than 10k to receive his/her qualification. I treat losing in the stock market as a form of tuition fees, a necessary investment. Investment in education always pay the best return. To make sure I get the highest return from my 'tuition fees', I make sure I analyze each losing trade to find out what mistakes I made and modify my trading rules accordingly.

    --------------------------------------

    http://www.tropicalvacationstory.com

  • Report this Comment On March 19, 2010, at 4:34 PM, jsbacker wrote:

    I am extremely sick and tired of TMF continuously touting their HANSEN NATURAL stab in the dark. It's simply nauseating. Great pick, we get it, enough already. Oh sure, I'll pay annual fees to to get a list of stocks, 1% of which actually turn out great. This is akin to the SmartTrend hoax which makes a call on everything and when it turns out correct, they publish their 'correctness'.

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