These Stocks Can Easily Double Your Money

A lot of investors were gloating about their stocks' 2009 performance.

Who are these people, you ask? Shareholders of some of these top-performing stocks:

Company

Rank

2009 Dividend-Adjusted Return

Market Capitalization
on Jan. 1, 2009

Diedrich Coffee

1

9,581%

$2.0 million

Vanda Pharmaceuticals (Nasdaq: VNDA  )

4

2,150%

$13.3 million

ValueVision Media (Nasdaq: VVTV  )

9

1,355%

$11.1 million

Pilgrim’s Pride (NYSE: PPC  )

11

1,313%

$46.7 million

Compugen (Nasdaq: CGEN  )

22

1,028%

$12.2 million

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

Notice anything about those companies? They're small. Very small. Now compare their performance with some of the top stocks of the S&P 500 index over the same time:

Company

Rank

Year-to-Date Dividend-Adjusted Increase

XL Capital

1

395%

Tenet Healthcare (NYSE: THC  )

2

369%

Genworth Financial (NYSE: GNW  )

5

301%

Amazon.com

18

162%

Sun Microsystems (Nasdaq: JAVA  )

25

145%

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

While the latter results are nothing to sneeze at, particularly given that the overall market was up just 26.5% over that period, wouldn't you rather have the former?

Where you'll find the double-baggers
Small caps' tendency to outperform their large-cap brethren isn't just a down-market happenstance -- it held true in 2005, 2006, 2007, and 2008, as well.

In any market, the stocks with the most potential for outsized returns (stocks that will double, triple, or even increase your investment tenfold) are not found among large caps, but rather among stocks that are:

  1. Ignored.
  2. Obscure.
  3. Very small.

Why? Because the market's greatest inefficiencies (and, thereby, greatest opportunities) lie hidden among the investments that Wall Street analysts and institutional investors shun only because of their size.

Starting today
Investing in small-cap stocks makes many people nervous -- and today's market volatility is sending many investors into the arms of stable, financially pristine large-cap stocks. Which makes now an even better time to buy up shares of oversold small caps.

But not all small caps are equal. You want to make sure you buy small caps that have a rock-solid balance sheet and a solid business model. Both these factors ensure that the company will be around five to 10 years from now, giving it plenty of time to double, triple, or increase tenfold in size.

At Motley Fool Hidden Gems, these are precisely the kinds of stocks we're recommending right now -- and we're putting real money behind our best ideas.

If you'd like to see all the stocks that have made it into our market-beating portfolio, you can find out completely free. Click here for more information.

Already a member of Hidden Gems? Log in here.

This article was originally published June 2, 2009. It has been updated.

Adam J. Wiederman doesn't own shares of the companies mentioned above. Amazon.com is a Motley Fool Stock Advisor recommendation. The Motley Fool's disclosure policy is a top performer.


Read/Post Comments (5) | Recommend This Article (16)

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 January 20, 2010, at 3:10 PM, bobtrader wrote:

    I may be looking at this wrong, but the first list of stocks were the 2009 Dividend-Adjusted Return. That is the return for the year of 2009.

    The second list of stocks, which he says he is comparing over the same time but is listed as the Year-to-Date Dividend-Adjusted Increase. I think this is a mistake.

    That is January 4th. That is 13 trading days.

    So compare say Genworth which is up from $12 at the start of 2010 to $13.50 today.

    And then look at Diedrich which started at around $35 at the beginning of 2010 and is down 40 cents as of today.

  • Report this Comment On January 20, 2010, at 4:37 PM, travi74 wrote:

    Umm... PPC (Pilgrim's Pride) is not really a "small, very small" company. It is one of the largest poultry processing in the world. Also, it applied for chapter 11 protection in Dec 2008. The returns that PPC stockholders are getting is not because it is a "hidden gem", but because we bought shares at 20-30 cents a pop in Dec08/Jan09.

    While I agree that small-cap companies will give a better ROI, Pilgrims Pride is a wrong example to cite, and to use as a basis for your analysis.

  • Report this Comment On January 22, 2010, at 3:41 PM, TMFDonauschwaben wrote:

    travi74,

    On a market-cap basis, even PPC was very small. $47 million market cap is tiny, regardless of the circumstances or size of the operation.

    Adam

  • Report this Comment On January 22, 2010, at 3:47 PM, TalibKweli wrote:

    Extremely high risk, extremely high return. Unless you have the risk profile of a dependent 18 year old living at home, stray away from these hopelessly volatile securities.

  • Report this Comment On January 25, 2010, at 11:20 AM, travi74 wrote:

    Fair enough, Adam.

    But the point remains that the returns on PPC have been due to their bankruptcy (Dec 2008), when the shares went under 20 cents each.. and not for any other reason whatsoever.

    I (and know of many others as well) turned hundreds into thousands on PPC, simply because of that. That investment was made solely on the hope that someone will buy out Pilgrims, which would otherwise have been wiped away. Had JBS not come along and done exactly that, the investment was a total loss.

    My point...? PPC returns are NOT because of being "1. Ignored, 2.Obscure & 3. Very small".

    Yes, small caps make good money, yes PPC made good money... but these are completely unrelated facts. We can't say that just because tomatoes are red, everything red is a tomato.

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