10 Outperformers Nobody Knows About Yet

"Most leading brokers cannot spare the time and money to research smaller stocks. You are therefore more likely to find a bargain in this relatively under-exploited area of the stock market."
-- James D. Slater, the master investor who invented the PEG ratio.

I certainly agree.

I've shown in the past exactly why Wall Street is always behind the game in finding the small stock winners that build fortunes; since Wall Street talks in billions, stocks worth millions are just too small to move their needles ... this isn't the case for you and me.

I've also documented how Warren Buffett used these very same small-cap stocks to start his fortune.  

Today, though, I want to share some of these small-but-mighty outperformers that are flying under the radar of most investors.

The outperformers
Before I show you these outperformers, let me clarify what I mean by an outperformer.

By outperformer, I do not necessarily mean a company whose stock has rocketed up in price. No, I'm talking about companies that have outperformed operationally; companies that have substantially grown their earnings ... and done so profitably. And we want these growing earnings at reasonable prices (before Wall Street catches on).

Using my Capital IQ institutional software package, I screened for the following criteria:

  • Five-year trailing earnings growth above 10% (annualized).
  • Five-year return on capital above 10% (average) vs. the S&P's five-year return on capital of just over 1%.
  • Forward P/E ratio below 20.

I found both larger companies you've likely heard of and smaller companies you probably haven't. I'm going to share the ones you've heard of first for two reasons:

  1. They provide a basis of comparison for the companies you're not familiar with.
  2. Larger stocks are an important part of any portfolio -- I'm merely saying that there are compelling (read: profitable) reasons to look at smaller, underfollowed companies. More on that shortly.

Here they are (in order of growth):

Company

5-Year Earnings Growth

5-Year Return on Capital

Forward P/E

Apple

74.4%

26.9%

18.3

Mosaic (NYSE: MOS  )

24.9%

16.8%

17.1

Coach (NYSE: COH  )

20.1%

40%

16.6

Oracle (Nasdaq: ORCL  )

15.5%

16%

14.7

Microsoft

14.6%

34.5%

14.6

Accenture (NYSE: ACN  )

14.4%

62.4%

15.2

General Mills (NYSE: GIS  )

13.4%

10.8%

15.5

AutoZone

13.3%

30.8%

11.9

ADP (Nasdaq: ADP  )

11.1%

21.5%

18.4

Clorox (NYSE: CLX  )

10.9%

21.3%

14.6

Source: Capital IQ, a division of Standard & Poor's.

All of these companies appear to be kicking some serious butt without the corresponding ultra-high price tag.

If you're looking to buy some solid larger-cap stocks, these are good research candidates. But I promised you another compelling reason to look deeper, at the smaller companies other investors don't know about yet.

The reason? The biggest returns in the market come from identifying a growth story before the market catches on. If you think Apple and Microsoft are compelling now, imagine buying them 20 years ago. The companies above are all huge in size. Though they've got impressive five-year growth, their size makes it harder for them to keep up that growth. Not so with the small companies I'm about to show you.

That's why Buffett exploited these kinds of small bargain stock opportunities in the past, before he got too big to do so.  

So here you go (in order of growth):

Company

5-Year Earnings Growth

5-Year Return on Capital

Forward P/E

American Italian Pasta Company

98.8%

15.4%

10.6

Bolt Technology

57.5%

15.7%

6.2

American Science & Engineering

50.9%

15.1%

18.5

AZZ

50.4%

17%

16.2

Immucor

40.6%

21.8%

17.8

Net 1 UEPS

20.8%

18.4%

7.8

Synaptics

20.5%

15.1%

12.0

UniFirst

13.8%

10.2%

15.9

Corinthian Colleges

13.2%

15.6%

10.1

J&J Snack Foods

13.2%

11.9%

17.2

Source: Capital IQ, a division of Standard & Poor's.

Very few investors are taking the time to look into these stocks -- which is a very good thing if you're trying to beat the market.

Our Motley Fool Hidden Gems analysts look exclusively for these kinds of stocks -- the small powerhouses that can turbocharge your portfolio. They've bought electrical equipment provider AZZ in their real-money portfolio -- you may have noticed in the table above that it's been growing at 50% but selling for just 16 times forward earnings. I invite you to join us in hunting down these ignored opportunities with a free 30-day trial. You'll get unfettered access to all of our research and picks. Click here to get started.

Anand Chokkavelu owns shares of Accenture and Microsoft. Accenture and Microsoft are Motley Fool Inside Value recommendations. American Science & Engineering and Net 1 UEPS Technologies are Motley Fool Rule Breakers choices. Apple and Coach are Motley Fool Stock Advisor recommendations. Net 1 UEPS Technologies is a Motley Fool Global Gains pick. Automatic Data Processing and Clorox are Motley Fool Income Investor recommendations. The Fool owns shares of and has written puts on Oracle. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of AZZ. The Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (51)

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 21, 2010, at 2:20 PM, tgauchat wrote:

    Why are there not hot links to tickers in the second list???

  • Report this Comment On April 21, 2010, at 4:47 PM, TMFBomb wrote:

    @tgauchat,

    Here are the tickers for those:

    American Italian Pasta Company (Nasdaq: AIPC)

    Bolt Technology (Nasdaq: BOLT)

    American Science & Engineering (Nasdaq: ASEI)

    AZZ (NYSE: AZZ)

    Immucor (Nasdaq: BLUD)

    Net 1 Ueps (Nasdaq: UEPS)

    Synaptics (Nasdaq: SYNA)

    UniFirst (NYSE: UNF)

    Corinthian Colleges (Nasdaq: COCO)

    J&J Snack Foods (Nasdaq: JJSF)

    -Anand (TMFBomb)

  • Report this Comment On April 21, 2010, at 6:31 PM, lonelyposeur wrote:

    Freebies are worth the extra typing.

  • Report this Comment On April 21, 2010, at 7:14 PM, SUPERMANSTOCKS wrote:

    I only need one Ticker! Its up over 100% since Feb 2010 and that is HNR. These guys sometimes just miss the boat. Maybe if they want growth they should have taken a closer look at that. Like Cramer says BUY BUY BUY! HNR is the way to go. It is doing far better than any of the tockers or stocks listed above in the article. Don't believe me? take a look at the chart for yoruself.

  • Report this Comment On April 22, 2010, at 1:04 AM, stan8331 wrote:

    Some very tasty looking stocks in this list - thanks!

  • Report this Comment On April 22, 2010, at 9:15 AM, batterygary wrote:

    SmarTrend identified a Downtrend for Mosaic (NYSE:MOS) on April 07, 2010 at $57.38. In approximately 2 weeks, Mosaic has returned 7.2% as of today's recent price of $53.26.

    Mosaic is currently below its 50-day moving average of $59.05 and below its 200-day moving average of $54.83. Look for these moving averages to decline to confirm the company's downward momentum.

    http://top-stock-investing.blogspot.com/2010/02/top-10-stock...

  • Report this Comment On April 22, 2010, at 11:05 AM, JimHim wrote:

    I give up. Where do you go to screen for 5-yr Return on Capital???

  • Report this Comment On April 22, 2010, at 3:18 PM, TMFBomb wrote:

    @JimHim,

    I used Capital IQ, which is institutional software (i.e. you have to pay for it). And even then I constructed a custom data point.

    Does anyone know of a good free screener that will let you screen for 5-year return on capital?

    -Anand

  • Report this Comment On April 25, 2010, at 11:56 AM, lucyf1036 wrote:

    Speaking of unknowns, has anyone taken a look at NetApp [NTAP]? Mine is up 147% and still going. I do have to disclose that one of my sons works there, which is the reason I bought the stock. Never thought it would perform this well!

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