Stocks Worth Waiting For

"Patience is the companion of wisdom." 
-- St. Augustine

Instant gratification is becoming more and more a part of our culture. Technology has allowed us to obtain information and services whenever we want them. Not sure what the word "indefatigable" means? Google can give you the answer in 0.02 seconds. Heck, you can download an entire music library from the comfort of your own home and play it a few minutes later on your iPod while you're making a quesadilla.

With stocks, however, not much has changed over the years. Large fortunes are still built over years and decades, not minutes and hours.

When we take the time to research a company and make an investment, it would be nice to receive instant confirmation that we made the right decision. Unfortunately, it might take quite a while to receive that confirmation.

Consider:

Company

Total Return, October 1999-October 2002

Total Return, October 2002-October 2009

Schnitzer Steel Industries (Nasdaq: SCHN  )

3%

770%

Cal-Maine Foods (Nasdaq: CALM  )

(6%)

1,464%

Noble Energy (NYSE: NBL  )

27%

353%

Permian Basin Royalty Trust (NYSE: PBT  )

29%

376%

Terra Nitrogen (NYSE: TNH  )

(16%)

5,436%

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

Patient investors got the last laugh. Despite the recent market volatility, each of these stocks crushed the 10-year returns of both the S&P and the Nasdaq -- a decade in which blue chips like Pfizer (NYSE: PFE  ) and Intel (Nasdaq: INTC  ) posted substantial losses.

The mustard seed
It can be particularly trying to wait for smaller companies, especially in a topsy-turvy market like this past year, but the fact remains that while the larger companies have legions of analysts following their every move, small companies attract little or no Wall Street coverage. This means that even if the company is growing, the market might be slow to catch on.

For instance, in May 2003, the best stock of the past 10 years, Hansen Natural, traded at approximately the same price it did in June 1998. During this period, the company ran a good business -- it increased net income by 67% and revenue by 97%, and it posted a double-digit return on equity while ramping up its profitable energy-drink lineup.

But the best was yet to come. When Wall Street eventually realized Hansen Natural's growth potential and its strong brand, the stock soared. Today, it's up about 6,800% in just about six and a half years -- turning $10,000 into $690,000 today. Patient investors who saw the potential in Hansen Natural's growth strategy have been rewarded, to say the least.

How do I get those returns?!
OK, Hansen Natural might be an extreme example. After all, not many stocks jump 6,800% in six years -- so I'll give you another example.

In July 2004, Fool co-founder Tom Gardner recommended Buffalo Wild Wings to Motley Fool Hidden Gems subscribers. He saw a rapidly growing $200 million restaurant chain with the potential to become a category-killer in casual dining. Moreover, the company had $47 million in cash, zero debt, and high insider ownership.

Everything pointed to higher returns, but 10 months later, the pick had risen by only 9%. Despite the weak returns, Tom still felt strongly about Buffalo Wild Wings' potential and recommended the stock two more times to Hidden Gems subscribers during this period.

Sticking to his guns paid off: Buffalo Wild Wings has largely bucked this recession, and the original recommendation has since returned 214%.

The Foolish bottom line
The market will eventually recognize exceptional companies -- and when it does, the returns can be huge. Sometimes, all it takes is a little patience.

Want to find some great stocks with tremendous upside potential? The Hidden Gems team specializes in finding unrecognized small companies with solid balance sheets, dominant positioning in their markets, and shareholder-friendly management teams.

Interested? Follow this link for your free trial.

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

This article was first published April 10, 2007. It has been updated.

Fool analyst Todd Wenning's random '90s movie of the day is PCU, starring a young Jeremy Piven and Jon Favreau. Todd owns no shares of any company mentioned. Intel and Pfizer are Motley Fool Inside Value recommendations. Hansen Natural and Google are Rule Breakers recommendations. The Fool owns shares of Buffalo Wild Wings, and its disclosure policy is not gonna protest.


Read/Post Comments (0) | Recommend This Article (5)

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.

Be the first one to comment on this article.

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: 1007120, ~/Articles/ArticleHandler.aspx, 12/22/2014 12:42:10 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