These 6 Stocks Could Make You a Millionaire

Judging from all the attention that big, well-known stocks get, you might think that they make the best investments. But to find the best stock prospects that will make you truly wealthy, you've got to look beyond the limelight.

Large-cap stocks certainly have their place in most investors' portfolios. Although they certainly aren't without risk, they do tend to be among the more stable stock investments you can make. You're unlikely to see explosive growth from widely held stocks, but since most of them are mature companies with stable business models, they also have relatively little risk of cataclysmic failure.

Owning a good portfolio of large-cap stocks should earn you returns in line with major market averages. If you're particularly good at picking stocks, you can hope to outperform those benchmarks by a percentage point or two. But if merely market-matching returns aren't enough to satisfy you, go beyond the headlines and seek out stocks like the ones you'll see below.

Think small for big profits
Stocks that are already proven money-makers give investors a lot of comfort. But you'll find even greater potential in the stocks of smaller, as-yet-unproven companies.

Historically, small-cap stocks have given investors higher returns than their large-cap brethren over the long haul. Why? Here are the top two reasons:

1. Their future is still ahead of them.
For the most part, large companies have already made their big splash in the marketplace. Sure, some innovative corporations can stay at the forefront of their industries even after they grow to behemoth size. But eventually, their sheer size prevents them from sustaining the same growth pace they enjoyed in their early days.

In contrast, small-cap stocks have plenty of room to grow. The companies have shown the success necessary to overcome their initial obstacles and have successfully attracted investors in public offerings of their shares. However, they have yet to realize their full potential.

2. Nobody's watching them.
With big companies, Wall Street analysts and institutional investors watch over their operations like hawks. With so many professionals looking over companies' shoulders -- often with prime access to the kind of information individual investors like you can only dream about -- it's tough for you to gain an edge. Just look at how many analysts track some of these top companies:

Stock

No. of Analysts

Google (Nasdaq: GOOG  )

37

Home Depot (NYSE: HD  )

31

Chesapeake Energy (NYSE: CHK  )

32

Amazon.com (Nasdaq: AMZN  )

31

Boeing (NYSE: BA  )

26

Source: Yahoo! Finance. Reflects number of analysts giving estimates for fiscal 2010 earnings.

In contrast, many small companies escape Wall Street's attention entirely. Even a strong performer such as Middleby (Nasdaq: MIDD  ) attracts fewer than 10 analysts, despite having risen nearly sixfold since 2003. Stocks that haven't yet put up impressive results to turn Wall Street's head often have fewer followers, if anyone.

So which stocks are best?
To help you figure out which small-caps are worthy of your notice, you'll need to do some digging. Here are a few rules of thumb about small-caps to get you started:

  • The smaller the company, the higher the potential return -- and the greater your risk.
  • Strong inside ownership can give you confidence that company managers aren't just trying to cash in cheap.
  • As with stocks of any size, you don't want to overpay. Seek out attractive valuations when they're available.

Just considering those factors, I ran a quick search on our Motley Fool CAPS screener, and came up with six small stocks with high inside ownership that currently trade at reasonable valuations:

Stock

% Stock Owned by Insiders

Current P/E Ratio

K-Tron International

12%

12.4

VSE

21%

9.4

Almost Family (Nasdaq: AFAM  )

12%

11.6

i2 Technologies

22%

12.8

AAON

28%

12.5

Wonder Auto Technology

58%

16.2

Source: Motley Fool CAPS.

By itself, a simple screen alone isn't enough to justify buying shares. But as a starting point for further research, these are worth a closer look.

So if you want better returns than well-known, widely held stocks can provide, don't overlook small-cap stocks. They could help boost your portfolio to a whole new level.

Small-cap stocks can make you millions, but not every small-cap stock is a good investment. Adam Wiederman knows some small caps that you'd be stupid to buy.

Fool contributor Dan Caplinger owns stocks both large and small, including shares of Chesapeake Energy. Google is a Motley Fool Rule Breakers recommendation. Amazon.com is a Stock Advisor pick. Chesapeake Energy and Home Depot are Inside Value selections. Almost Family and Middleby are Motley Fool Hidden Gems selections. The Fool owns shares of Middleby, K-Tron International, and Chesapeake Energy. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy gives you a big edge.


Read/Post Comments (5) | Recommend This Article (47)

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 October 01, 2009, at 5:08 PM, 11787HOT wrote:

    Thanks for your informative articles. I'm learning more with each one.

    Nkageff

  • Report this Comment On October 09, 2009, at 2:13 PM, teejk wrote:

    Just a general comment on small-cap/high insider ownership (and no reflection on any of the stocks mentioned because I haven't looked at any of them):

    read the SEC filings carefully regarding equity compensation and other benefits to the insiders that are triggered by a small-cap making it to the big-leagues.

  • Report this Comment On October 09, 2009, at 2:24 PM, mikecart1 wrote:

    We need more articles like this and less by that dude Rick that has an agenda with SIRI.

  • Report this Comment On October 09, 2009, at 2:53 PM, Mktintelanalyst wrote:

    The only way to assure that these picks would make you a millionare - start off as a multi-millionaire.

    Investing in any stock can be successful but when to buy - when to sell?

    My strategy is to start of as a millionare and then invest in solid companies that do not rely on technology or rapid growth and that pay dividens. If you ever do get to multi-millionare status, then maybe these more speculative picks would be in the realm of prudent risk taking for tax purposes and estate giving strategies that may apply.

  • Report this Comment On October 09, 2009, at 6:09 PM, KAL64 wrote:

    I own VSE (VSEC) in my RP - the company basically contracts with the U.S. gov't in several areas: engineering/logistics, IT services, etc. They are very small with only a 200M market cap. The company's balance sheet is solid and they sport 5.28 in FCF. P/E of 8.3 based on last Q's earnings.

    I bought shares a month ago and the share price is up 24%. Avg DV over last 90 days: 35,000

    5 star CAPS pick: once WS locks in on this company, it will easily double from where I bought it. The question is when....

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: 997892, ~/Articles/ArticleHandler.aspx, 12/18/2014 5:31:12 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