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 three 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 warmup 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 10 top-performing stocks of the past 365 days.

Lately, folks have been listing hot tech names like Apple. Granted, it has at least doubled over the past year, but it isn't even among the 10 top-performing large caps ...

Large-Cap Stock (>$10B)

Market Cap

52-Week Gain

Mechel

$10.2 billion

171%

Baidu

$22.2 billion

161%

Fifth Third Bancorp

$11.4 billion

158%

Teck Resources

$22.3 billion

148%

priceline.com

$11.2 billion

126%

Intuitive Surgical

$13.5 billion

114%

Las Vegas Sands

$15.4 billion

111%

VMware

$24.9 billion

105%

Ctrip.com

$10.1 billion

101%

Cummins

$14.5 billion

98%

Source: Google Finance as of May 10.

Now, let's have a look at the top 10 performers overall ...

Stock

Market Cap

52-Week Gain

Keryx Biopharmaceuticals

$329 million

1,951%

General Growth Properties

$4.7 billion

1,668%

inTEST Corporation

$36 million

1,540%

Somaxon Pharmaceuticals

$160 million

1,316%

Magnum Hunter Resources

$292 million

1,070%

Jazz Pharmaceuticals

$280 million

1,041%

Human Genome Sciences

$4.7 billion

1,041%

Select Comfort

$541 million

922%

Radio One

$248 million

876%

Spanish Broadcasting System

$114 million

859%

Source: Google Finance as of May 10.

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 (Nasdaq: BOOM  ) , Prestige Brands (NYSE: PBH  ) , and AZZ (NYSE: AZZ  ) 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, Prestige Brands has a stable of relatively recession-resistant health-related brands (including Compound W, Comet, Clear Eyes, and Chloraseptic) and a focused strategy, makes a lot of cash, and as our Hidden Gems team puts it, “possesses some delightful hidden assets.”

And AZZ primarily designs and manufactures specialized parts and equipment for utilities and industrial companies -- things like bus ducts, power distribution enclosures, relay panels, switch gear, and substation services.

You can bet this division will thrive as the U.S. government begins investing billions -- possibly even trillions -- into rebuilding our power grid. Yet, thanks to the recent downturn in infrastructure spending, AZZ is selling well below what our analysts consider fair value.

Couple that with AZZ's healthy balance sheet (lots of cash, with $100 million in senior notes not payable until 2018) and solid 2.7% dividend, and you'll begin to see why our Hidden Gems team recently opened a small position.

Granted, these three companies are already up 47%, 13%, and 33%, respectively, since the Hidden Gems team purchased shares. But they're all well-positioned to rocket even higher once the economic recovery kicks into full gear.

The big payoff for you
While large-cap companies with strong brands, wide consumer appeal, and aggressive marketing campaigns like Las Vegas Sands (NYSE: LVS  ) and priceline.com (Nasdaq: PCLN  ) have rebounded nicely from last year’s lows, the fact of the matter is they are followed by dozens of Wall Street analysts.

In other words, even though they may grow modestly going forward, it's unlikely the market is drastically misjudging their value today, and there is very little chance they’ll be among the market's biggest overall winners of the next 52 weeks.

Furthermore, it would take at least another $15 billion for shares of a company the size of Las Vegas Sands to double. But if a far more nimble small cap like Dynamic Materials gained even 1/10th that amount,  its shares should rise more than 675%.

Granted, I can't guarantee that it 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 $10 billion) will make the list.

Want a piece of that action?
If you're still convinced that 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 doesn’t own shares of any of the companies mentioned. Dynamic Materials and Ctrip.com are Motley Fool Hidden Gems recommendations. Apple and Priceline.com are Stock Advisor selections. Baidu, VMware, and Intuitive Surgical are Rule Breakers picks. The Motley Fool owns shares of Dynamic Materials, AZZ, and Prestige Brands. The Motley Fool is investors writing for investors and has a disclosure policy.


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  • Report this Comment On May 11, 2010, at 5:17 PM, VikingJustice wrote:

    According to the Fool's, my purchase of LVS at 1.87 per share was a bonehead move - oh well....

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