One Bet You're Sure to Lose

Four minutes from now, you and I are going to make a bet -- and I can virtually guarantee you will lose.

But first I'm going to tell you something that may shock you, explain how it can lead you to the top 10 stocks of the next 365 days, and give you the names of two stocks our analysts are convinced will trounce the market over the coming year and beyond.

Up to the challenge?
Good. Let's start with a little warm-up exercise I do with anyone who asks me for a hot stock tip. Take the next minute or so to jot down a few stocks you think are among the top 10 stocks of the past 365 days.

Lately, most folks have been listing Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  ) , and every other big-name financial company that was left for dead last year. To be fair, they are on the right track. After all, Goldman Sachs (NYSE: GS  ) and Freddie Mac (NYSE: FRE  ) have soared as much as 70% and 400% from their respective 52-week lows.

So, what did make the top 10? Let's have a look ...

Stock

52-Week Gain

Market Cap

HeartWare International

5,763%

$268 million

Vanda Pharmaceuticals

1,239%

$337 million

Diedrich Coffee

985%

$111 million

OncoGenex Pharmaceuticals

732%

$236 million

Zoom Technologies

697%

$20 million

Cott Corp.

615%

$575 million

Speedus Corp.

595%

$21 million

VocalTec Communications

513%

$15 million

Arcadia Resources

511%

$171 million

Dollar Thrifty Automotive Group (NYSE: DTG  )

497%

$553 million

Source: Google Finance.

Shocked?
Most people are. After all, these are companies most investors have never even heard of -- let alone seen on CNBC or read about in Fortune, Money, or Forbes.

Now, you might think this is some sort of anomaly caused by last year's near financial collapse, but it actually holds true year after year after year. That's because, as Motley Fool co-founder Tom Gardner points out, the next home run stock will almost always be:

  1. Small (market cap of less than $2 billion)
  2. Obscure
  3. Ignored

In fact, Tom Gardner launched our Motley Fool Hidden Gems small-cap stock service with one goal in mind -- to uncover well-managed, fast-growing, cash-generating businesses that are simply too small or too obscure for Wall Street analysts to cover.

Two Hidden Gems we're betting on now
Back in March, Tom handed $250,000 over to his two top small-cap analysts and tasked them with building a real-money, best-of-the-best small-cap portfolio.

Of the stocks Seth Jayson and Andy Cross have purchased so far (all 14 positions are in positive territory and five are up more than 50%), two that have particularly caught my eye are Dynamic Materials and Innophos.

Dynamic Materials is a dominant player in the highly specialized explosive metal-working industry. In fact, it's the biggest company of its kind in both North America and Europe -- and because this is a very hard industry to break into, it is highly unlikely major competitors will spring up anytime soon.

Meanwhile, Innophos makes specialty phosphates that are found in everything from sports drinks to toothpaste to asphalt. Like Dynamic Materials, it has relatively little competition. In fact, it controls as much as 40% of the $1.4 billion North American market.

Both companies have seen sales slow recently because of the economy, but are well-positioned to rocket upward once the recovery kicks into full gear.

The big payoff for you
Unlike household names Home Depot (NYSE: HD  ) and DuPont (NYSE: DD  ) , these companies aren't followed by dozens of Wall Street analysts -- meaning there is a much greater chance investors are misjudging their true value.

And whereas it would take another $47 billion for Home Depot shares to double, were either of these small companies to gain even a tenth of that amount, their shares should soar as much as 1,850% and 1,050%, respectively.

Granted, I can't guarantee that either of these companies will be among the 10 top stocks of the next 365 days, but I will bet you that not a single large-cap stock (more than $5 billion) will make the list.

Want a piece of that action?
If, despite everything I've told you, you're still convinced a big, well-known company will make the list, I challenge you to use the comment function below to tell us its name, ticker, and why you think it will outperform all the rest over the coming year.

I'll run the numbers 365 days from now, and if your large-cap makes the list, I'll write another article telling everyone that you won the bet. In the meantime, I urge you to spend some time searching for well-run, cash-generating businesses that are too small to show up on Wall Street's radar.

If you'd like a little help, you can get full access to all of our Hidden Gems small-cap research and stock picks -- including our real-money small-cap portfolio -- by taking a free 30-day trial.

There is no cost, nor any obligation to subscribe. All you have to do is click here.

Already subscribe to Hidden Gems? Log in at the top of this page.

Austin Edwards doesn't own shares of any of the companies mentioned. Dynamic Materials and Innophos are Motley Fool Hidden Gems recommendations. Home Depot is an Inside Value recommendation. The Motley Fool owns shares of Dynamic Materials and Innophos. The Motley Fool is investors writing for investors, and has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (9)

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 25, 2009, at 9:21 AM, pondee619 wrote:

    Just for kicks and giggles, how many of those top ten were HG picks?

  • Report this Comment On September 25, 2009, at 10:10 AM, lution wrote:

    I'm confused. The table lists HeartWare International

    up 5763% but when I go look at the financials on Google finance for the stock its 52 week range is 18.40 - 30.51. How can this thing be up 5763%, looks like its an IPO/new listing that started out around $30?

  • Report this Comment On September 25, 2009, at 10:20 AM, catoismymotor wrote:

    Heartware International's Chart from Yahoo!

    http://finance.yahoo.com/echarts?s=HTWR#chart4:symbol=htwr;r...

  • Report this Comment On September 25, 2009, at 10:32 AM, pondee619 wrote:

    Dear catoismymotor: So, if you got in after Feb 23, you missed the stock. Did the Fool have an opiniion on Heartware International pre Feb 23?

    While hyping HG, how many of their picks have come close to a 500% gain in the last year? Has ANY fool pick come close to the returns shown by the table in ths article?

  • Report this Comment On September 25, 2009, at 10:47 AM, catoismymotor wrote:

    Pondee, it looks that way. I was not able to fing HTWR on the fool before I resorted to going to Yahoo!. For the record;I don't like it when the price shoots up like that. It makes my @$$ twitch.

    BTW: I do not subscribe to any of the fool services. I am just an interested observer and rabble rouser.

  • Report this Comment On September 25, 2009, at 11:52 AM, pondee619 wrote:

    I am just an interested observer and rabble rouser.

    Me too. I love these stories that start out by giving you examples of outsized gains and end by touting a subscription based service that in no way approaches those gains. Bait and switch lives at the fool.

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