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, folks have been listing big financial firms like Bank of America (NYSE: BAC  ) and Goldman Sachs (NYSE: GS  ) . To be fair, they're on the right track; there are some notable financial firms – including Bank of America -- among the 30 top-performing large caps ...

 Large-Cap Stock (>$5B)

Market Cap

52-Week Gain

Rank Among Large Caps

Fifth Third Bancorp (Nasdaq: FITB  )

$9 billion

587%

No. 2

Genworth Financial

$6.8 billion

492%

No. 3

Seagate Technologies (NYSE: STX  )

$9.3 billion

310%

No. 8

Royal Caribbean Cruises (NYSE: RCL  )

$5.4 billion

283%

No. 9

Textron (NYSE: TXT  )

$5.2 billion

211%

No. 18

Bank of America

$127.6 billion

210%

No. 19

Barclays PLC (ADR) (NYSE: BCS  )

$48.2 billion

180%

No. 26

Source: Google Finance, as of Feb. 8.

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

Stock

Market Cap

52-Week Gain

Diedrich Coffee

$198 million

9,785%

Orient Paper

$152 million

2,540%

Select Comfort

$336 million

2,198%

Dollar Thrifty Automotive Group

$542 million

1,904%

ValueVision Media

$131 million

1,771%

Valassis Communications

$1.2 billion

1,566%

Pier 1 Imports

$583 million

1,388%

Avis Budget Group

$1.1 billion

1,367%

Vanda Pharmaceuticals

$285 million

1,335%

Cell Therapeutics

$451 million

1,266%

Source: Google Finance, as of Feb. 8.

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 financial near-collapse, but it actually holds true year after 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 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 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, 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 that 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 -- 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 $149 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 645% and 385%, 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 box 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 you like it; pay nothing if you don't. To learn more, simply click here.

This article was originally published on Aug. 20, 2009. It has been updated

Austin Edwards owns shares of AT&T. Dynamic Materials and Innophos are Motley Fool Hidden Gems recommendations. 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 February 09, 2010, at 1:00 PM, tugdad wrote:

    I think you may have missed one in your 365 days from now " bet ". Of the large caps you listed my money is on Textron. It will be there next year. All you need do is check the state of the world. TXT's products will be in large demand. From tugdad

  • Report this Comment On February 09, 2010, at 2:13 PM, pondee619 wrote:

    What happened to the "this article was originally publishd..." disclaimer?

    One Bet You're Sure to Lose

    By Austin Edwards

    August 20, 2009 http://www.fool.com/investing/small-cap/2009/08/20/one-bet-y...

    One Bet You're Sure to Lose

    By Austin Edwards

    September 25, 2009 http://www.fool.com/investing/small-cap/2009/09/25/one-bet-y...

    One Bet You're Sure to Lose

    By Austin Edwards

    October 30, 2009 http://www.fool.com/investing/small-cap/2009/10/30/one-bet-y...

    One Bet You're Sure to Lose

    By Austin Edwards

    December 3, 2009 http://www.fool.com/investing/small-cap/2009/12/03/one-bet-y...

    One Bet You're Sure to Lose

    By Austin Edwards

    January 7, 2010 http://www.fool.com/investing/small-cap/2010/01/07/one-bet-y...

    And now February 9, 2010. Kindda nice to know that nothing has changed in 7 months. I thought it was fool policy to tell it's readers that they have read re-cycled words.

  • Report this Comment On February 09, 2010, at 4:11 PM, bleu52 wrote:

    Talk about recycled. Dunno if I've ever clicked on one of these Fool articles where I didn't see this Ponzee guy griping about something or other.

    Musta made a bundle in the stock market to have so much time on his hands. Then again, if he's got so much money, why's he wasting all of his time on here?

    My money is on disgruntled ex-employee. Or maybe the Fools just never hired him in the first place. Either way, seems like he needs to get a job and a life.

  • Report this Comment On February 10, 2010, at 10:36 AM, pondee619 wrote:

    bleu52:

    Maybe you are right. The fool is the best thing since sliced bread. Must be great as it never changes, just repeats. If you are really satisfied witht he fool product, I'm easy enough to ignore. Just pointing out that the emperor has no clothes. All of your assumptions are wrong. It only takes about 5 minutes to critique a fool article. Just hoping that they will live up to their promise. I realize that this is a Fool's errand.

    Those Fools who believe that this is a worthwhile story, give it a Rec. It has 6 now.

  • Report this Comment On February 16, 2010, at 8:27 AM, pondee619 wrote:

    bleu52:

    It now has 7. One fool believed that this story was worthwhile. One fool out of the 100K+ in the collective intelligence of the fool community.

  • Report this Comment On February 16, 2010, at 8:27 AM, pondee619 wrote:

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