A lot of investors are already gloating about their investing performance in 2010.
Who are these people, you ask? Shareholders of some of these top-performing stocks:
|
Company |
Rank |
Dividend-Adjusted Return (YTD) |
Market Capitalization |
|---|---|---|---|
|
Somaxon Pharmaceuticals |
4 |
152.8% |
$25.5 million |
|
Cyclacel Pharmaceuticals |
7 |
130.8% |
$25.4 million |
|
GenVec |
15 |
100.0% |
$127.6 million |
|
Adeona Phamaceuticals |
23 |
87.5% |
$12.0 million |
|
NexMed |
30 |
71.9% |
$27.2 million |
Data from Capital IQ, a division of Standard & Poor's.
YTD = year to date.
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 |
Dividend-Adjusted Increase (YTD) |
|---|---|---|
|
Eastman Kodak |
1 |
44.3% |
|
Zions Bancorp |
2 |
42.3% |
|
Lennar |
3 |
35.8% |
|
Tyson Foods |
4 |
34.0% |
|
Huntington Bancshares |
5 |
32.1% |
Data from Capital IQ, a division of Standard & Poor's.
YTD = year to date.
While the latter results are nothing to sneeze at, particularly given that the overall market has dropped 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:
- Ignored.
- Obscure.
- 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 the past few years' market volatility is sending many investors into the arms of stable 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 small-cap portfolio, you can find out completely free. Click here for more information.
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This article was originally published June 2, 2009. It has been updated.
Adam J. Wiederman doesn't own shares of the companies mentioned above. The Motley Fool's disclosure policy is a top performer.
