The Best Stocks You've Never Heard Of

What stocks were the best performers over the past decade? The 255% advance for Royal Bank of Canada wasn't too shabby. Australia's BHP Billiton has managed an even better 487%.

But these two were nowhere near the top performers of the past 10 years. That list is made up of real rocket shots like natural gas specialist Southwestern Energy -- which put up returns of nearly 5,300% -- and Amedisys, which was up more than 4,200%.

So how did the second duo deliver such clobbering gains? A lot of things are likely at play, not the least of which are a good business and great execution. But the second two stocks also have something else important in common: They're tiny and not very well-known.

The fact that smaller stocks that haven't been discovered by Wall Street have a tendency to blow past their larger brethren is something my fellow Fools know well -- particularly the team at Motley Fool Hidden Gems.

But where do we start if we want to find the stocks that will put up market-trouncing returns over the next 10 years? I've decided to turn to the 165,000 members in the Motley Fool's CAPS community. Below I've listed five stocks that have a market cap of less than $1 billion and are highly rated by CAPS members.

Company

Market Cap

Projected 5-Year Growth

CAPS Rating
(out of 5)

Hercules Offshore (Nasdaq: HERO  )

$275 million

15%

****

Sigma Designs (Nasdaq: SIGM  )

$317 million

20%

*****

Volcom (Nasdaq: VLCM  )

$462 million

20%

****

JA Solar (Nasdaq: JASO  )

$731 million

16%

****

Diana Shipping (NYSE: DSX  )

$902 million

10%

*****

Source: CAPS and Yahoo! Finance.

While these aren't meant to be formal recommendations, they could be a great place to begin further research. Let's take a closer look.

Digging in
Now just because CAPS members like these stocks doesn't mean I have to be crazy about them. And, frankly, most of them don't do a whole lot for me.

JA Solar has grown quite impressively in the five short years it has been in existence. The company started with production capacity of just 25 megawatts per year; it finished 2009 with 800 megawatts of capacity and delivered $800 million in revenue over the past 12 months. However, JA Solar has relatively low margins, faces tough competition from larger companies like First Solar (Nasdaq: FSLR  ) , and is part of an industry that has a lot of maturing to do -- and that means that companies are likely to come and go.

In a similar vein, the opportunity for Sigma Designs -- which makes processor chips for IPTV boxes (to deliver TV over the Internet) -- is still largely ahead of the company. That is, if that opportunity still arrives. A few years back, the growth seemed nearly unstoppable and profits were pouring in for Sigma Designs, but lately that hasn't exactly been the case, as growth has been choppy and profits are slimmer. While my fellow Fool Anders Bylund agrees with the CAPS community's hearty endorsement, I'm finding it pretty comfortable on the sidelines for now.

A recession-driven slump in offshore drilling was the start of Hercules Offshore's problems, but there's little doubt that the question marks surrounding drilling in the Gulf of Mexico have been driving the knife in a bit deeper. With the company's relatively debt-heavy balance sheet and not-so-healthy exposure to the Gulf, I think investors with an eye for offshore drilling may be better off looking elsewhere. Motley Fool Stock Advisor pick Atwood Oceanics (NYSE: ATW  ) , for instance, held up much better during the downturn, has a much stronger balance sheet, and has most of its fleet outside of the rattled U.S. market.

As for Volcom, it certainly seems like a company that you wouldn't want to bet against. Before the recession, growth was piling up rather nicely, even if falling margins did take away some of that sheen. Looking ahead, though, I can't help but wonder if Volcom really has what it takes to be a bigger player in the fickle world of fashion. There is undoubtedly a sizeable market for the company's threads, but is the appeal broad enough to keep Volcom from bumping its head on the ceiling? CAPS members seem to think so, but I'll take a pass.

The call from CAPS
While all these stocks earned sterling ratings from CAPS members, I think the community may really be on to something when it comes to Diana Shipping.

I don't have my head in the sand when it comes to the economy, but I think we're going to see a lumpy, halting recovery, rather than the nasty follow-on dive that many investors seem to be bracing themselves for. And a continuing recovery of the global economy would help push this dry-bulk shipper forward.

If you're on board with the idea that the global economy will at least experience a slow recovery, then the rest of the case for Diana is pretty simple. The company has maintained a healthy balance sheet while growing its fleet and has managed to produce attractive returns on its equity. It also logged a fleet utilization rate of 99.7% in the first quarter and has margins that stack up well against its competitors, and its stock looks cheap based on just about any multiple you want to consider.

Or, as CAPS member Xitopie recently put it: "... this is the time to be accumulating shares of good companies in industries that are currently out of favor for the long term. Diana and [Genco] are perhaps the best in class players in this industry."

Make your call
The CAPS community is all about getting everyone's opinion into the mix. So now it's your turn. Head over to CAPS and let the 165,000 members know what you think about any of the other stocks listed above.

Wall Street misses out on some of the biggest home run stocks by ignoring small stocks like the ones listed above.

First Solar and Sigma Designs are Motley Fool Rule Breakers choices. Atwood Oceanics is a Motley Fool Stock Advisor selection. Volcom is a Motley Fool Hidden Gems recommendation. The Fool owns shares of Volcom. 

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool. The Fool's disclosure policy thinks Mr. Market is just plain crazy.


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