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, some folks have been listing Amazon.com (Nasdaq: AMZN  ) and Baidu (Nasdaq: BIDU  ) . To be fair, they are on the right track -- both hit fresh 52-week highs recently. But they are nowhere near cracking the top 10. In fact, they’re not even among the top-performing large caps:

 Large-Cap Stock (>$5B)

Market Cap

52-Week Gain

Rank Amongst Large Caps

Baidu

$14 billion

114%

No. 87

Amazon.com

$53 billion

146%

No. 48

Yamana Gold (NYSE: AUY  )

$8 billion

202%

No. 17

Freeport-McMoRan (NYSE: FCX  )

$33 billion

226%

No. 12

Sterlite Industries India (ADR) (NYSE: SLT  )

$14 billion

303%

No. 2

Source: Google Finance.

But don’t forget, those are just the top-performing large caps. So, what made the top 10 overall? Let's have a look ...

Stock

52-Week Gain

Market Cap

HeartWare International

11,224%

$337 million

Diedrich Coffee

3,592%

$145 million

Vasogen

2,050%

$57 million

Radio One

1,775%

$102 million

Dollar Thrifty Automotive Group

1,495%

$425 million

Keryx Biopharmaceuticals (Nasdaq: KERX  )

1,485%

$95 million

Entercom Communications

1,369%

$279 million

The Providence Service Corporation

1,299%

$164 million

Boise Inc.

1,246%

$408 million

Select Comfort

1,135%

$274 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 (12 of 15 positions are in positive territory, and nine are up double-digit percentages), 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 like AT&T (NYSE: T  ) -- which I have owned for years without seeing any real reward -- 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 $154 billion for AT&T shares to double, were either of these small companies to gain even one one-hundredth of that amount, their shares should soar as much as 680% and 370% 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. Stick with us if it makes you like it, pay nothing if you don’t. To learn more, simply click here.

Already a member of Hidden Gems? Log in at the top of this page.

Austin Edwards owns shares of Freeport-McMoRan and AT&T. Dynamic Materials is a Motley Fool Hidden Gems recommendation. Amazon is a Stock Advisor selection. Baidu is a Rule Breakers pick. Sterlite Industries is a Global Gains pick. 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 (2) | Recommend This Article (12)

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 30, 2009, at 10:45 AM, pondee619 wrote:

    That is a great list of small cap stocks. Sure to make one very comfortable in their retirement if one was fortunate enough to have owned one. Were any on that list picks of HG prior to their great run? Does any HG pick have a return that approaches 1,000% over the past 52 weeks? Over any 52 week period? Does that list of small cap stocks have any relevance to HG other that to show us what MIGHT happen? Isn't this list complete BS used only to excite our inner greed in your attempt to get us to spend money on a service that does not approach the standards set in the article?

    YES, if you invest in small cap stocks you COULD attain 1,000% gains within a year, but not if you invest in HG picks. Sign up now. How about we see if any HG current pick is up 1,000% 52 weeks from today. I won't hold my breath looking for that story.

  • Report this Comment On November 03, 2009, at 11:52 AM, spark60 wrote:

    Let’s look at the big picture. Sure SLT went up over 300% since March but it went down from over $21 a share in July of 08 to $4 in March of 09. Today it is trading for just over $16. So if you had the stock before the March meltdown you still could be losing money if you sold it today.

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