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 performing stocks of the upcoming year; and give you the names of two stocks that 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 performing stocks of the past 365 days.

Lately, folks have been listing tech names like Amazon.com (Nasdaq: AMZN  ) and Baidu (Nasdaq: BIDU  ) . Granted, both have had good runs over the past year, but neither is even among the 30 top-performing large caps ...

 Large-Cap Stock (>$5B)

Market Cap

52-Week Gain

Rank Among Large Caps

Dendreon (Nasdaq: DNDN  )

$5.4 billion

794%

No. 4

MGM Mirage (NYSE: MGM  )

$5.9 billion

358%

No. 11

Host Hotels & Resorts (NYSE: HST  )

$9.9 billion

287%

No. 19

Hartford Financial (NYSE: HIG  )

$11.3 billion

277%

No. 21

CBS (NYSE: CBS  )

$10 billion

265%

No. 23

Source: Google Finance, as of April 6, 2010.

Now, let's have a look at the top 10 performing small caps ...

Stock

Market Cap

52-Week Gain

Somaxon Pharmaceuticals

$215 million

2,584%

Diedrich Coffee

$199 million

2,389%

Dollar Thrifty Automotive Group

$995 million

2,388%

Dana Holding Corporation

$1.7 billion

2,304%

Netlist

$74 million

1,900%

Valassis Communications

$1.4 billion

1,681%

Keryx Biopharmaceuticals

$176 million

1,613%

Orient Paper

$129 million

1,546%

Sport Chalet

$43 million

1,502%

ArvinMentor

$1.4 billion

1,446%

Source: Google Finance, as of April 6, 2010.

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 2009, 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 any time 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 39% and 74%, 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 $155 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 741% and 246%, 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 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 comments 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. Amazon is a Stock Advisor selection. Baidu is a Rule Breakers 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 (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 April 06, 2010, at 5:13 PM, gfbjohn wrote:

    OK, so did anyone list a company in the comments for the original article? I sure don't have one :)

  • Report this Comment On April 06, 2010, at 6:17 PM, thecannula wrote:

    You already have it in this listing- DNDN - 11 months post 5/1 FDA approval will be a 10 bagger.

    Scott

  • Report this Comment On April 06, 2010, at 6:18 PM, getrickqk wrote:

    Wow, Dendreon is now on the list of large companies. But if the Motley Fools writers and contributors had recommended Dendreon last year when it was just a small struggling, heavily shorted stock, more small retail investor would have made a lot of money even with that 'meager' 794% gains in the last 12 months!

  • Report this Comment On April 06, 2010, at 11:57 PM, webjawns wrote:

    What about Jamba Juice (JMBA)? Up more than 500% from last year.

  • Report this Comment On April 06, 2010, at 11:57 PM, webjawns wrote:

    What about Jamba Juice (JMBA)? Up more than 500% from last year.

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