One Bet You're Sure to Lose

Four minutes from now, you and I will 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 airlines stocks like Delta (NYSE: DAL  ) and Southwest (NYSE: LUV  ) . Although both have had a good run over the past couple months, neither is even among the 30 top-performing large caps of the past year...

 Large-Cap Stock (>$5B)

Market Cap

52-Week Gain

Rank Among Large Caps

Human Genome Sciences

$5.1 billion

1,344%

No. 1

Mechel OAO (NYSE: MTL  )

$10.1 billion

563%

No. 4

Fifth Third Bancorp

$9.8 billion

433%

No. 8

International Paper (NYSE: IP  )

$10.8 billion

297%

No. 13

Dow Chemical (NYSE: DOW  )

$34 billion

280%

No. 15

Wipro Limited

$32.8 billion

265%

No. 18

Cliffs Natural Resources (NYSE: CLF  )

$7.7 billion

249%

No. 28

Source: Google Finance, as of March 4.

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

Stock

Market Cap

52-Week Gain

Diedrich Coffee

$200 million

6,820%

Dollar Thrifty Automotive Group

$666 million

4,131%

Orient Paper

$146 million

3,003%

Dana Holding Corporation

$1.6 billion

2,973%

Select Comfort

$445 million

2,467%

Pier 1 Imports (NYSE: PIR  )

$808 million

2,446%

Avis Budget Group

$1.1 billion

2,291%

Boise Inc.

$437 million

1,800%

Telestone Technologies

$176 million

1,745%

Valassis Communications

$1.3 billion

1,743%

Source: Google Finance, as of March 4.

Shocked?
Most people are. For the most part, 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. 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, Dynamic Materials and Innophos have particularly caught my eye.

Dynamic Materials is a dominant player in the highly specialized explosive metalworking 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's highly unlikely that major competitors will spring up anytime soon.

Meanwhile, Innophos makes specialty phosphates 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.

These companies are already up 63% and 46%, respectively, since the Hidden Gems team purchased shares. But they're both well-positioned to rocket even higher once the economic 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's a much greater chance that investors are misjudging their true value.

And while it would take another $147 billion for AT&T shares to double, if either of these small companies gained even one one-hundredth of that amount, their shares could soar as much as 605% and 271%, 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 if you're still convinced a big, well-known company will make the list, despite everything I've told you, 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 is a Motley Fool Hidden Gems recommendation. The Motley Fool owns shares of Dynamic Materials and Innophos. The Motley Fool is investors writing for investors and has a disclosure policy.


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  • Report this Comment On March 07, 2010, at 6:13 AM, ajaykc wrote:

    I can bet on two stock that will outperform for at least this year and the names are--Alcatel Lucent (ALU) and Citigroup (C).

    ALU; This stock has been beaten so much that it has to rebound this year. I saw their webcast for the 2009 4th quarter financial results and forecast for 2010 and I am pretty much convinced of their future.

    C; same story for this bank, the stock is brutally beaten and it will bounce back. It will be a learning experience for this bank and so does for other banks in the US.

    I bet on these two stocks yet I agree with your philosophy of picking up stocks which has less hype from Wallstreet (bunch of morons).

  • Report this Comment On March 07, 2010, at 6:39 AM, ajaykc wrote:

    I can bet on two stock that will outperform for at least this year and the names are--Alcatel Lucent (ALU) and Citigroup (C).

    ALU; This stock has been beaten so much that it has to rebound this year. I saw their webcast for the 2009 4th quarter financial results and forecast for 2010 and I am pretty much convinced of their future.

    C; same story for this bank, the stock is brutally beaten and it will bounce back. It will be a learning experience for this bank and so does for other banks in the US.

    I bet on these two stocks yet I agree with your philosophy of picking up stocks which has less hype from Wallstreet. Wallstreet is too busy to fill their pocket than finding real good businesses.

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