Promising Stocks Wall Street Ignores

The following information may shock you: Wall Street analysts cover far fewer companies today than they did just a few years ago.

According to SmartMoney, "In 2000 ... more than 7,600 companies were covered by at least three analysts. Today, that number is below 6,000."

What companies are ignored by Wall Street? The smallest ones. In fact, more than 90% of the thousands of publicly traded companies that have no analyst coverage are small caps.

That means opportunity for all of us.

Opportunity? What opportunity?
We know that small companies offer the market's best returns, so the dearth of analyst coverage means that small-cap stocks are more likely to be priced inefficiently. Ergo, we can -- under optimal circumstances -- buy the market's most promising stocks at the market's best prices.

That's a recipe for success, and it's one of the reasons we focus exclusively on researching small- and micro-cap stocks at Motley Fool Hidden Gems. Just take a look at some of the stocks we've highlighted, and the number of pros who work their beats.

Company

Market Cap ($mm)  

Analysts Covering

Cass Information Systems (Nasdaq: CASS  )

$248

0

Kenneth Cole Productions (NYSE: KCP  )

$198

6

Crystal River Capital (NYSE: CRZ  )

$17

3

Iteris (AMEX: ITI  )

$38

4

Data from Yahoo! Finance and Thomson ONE.

Meet the efficient market
Compare that amount of analyst coverage with what three larger companies on the market get:

Company

Market Cap ($mm)  

Analysts Covering

Verizon Communications (NYSE: VZ  )

$71,850

34

United Parcel Service (NYSE: UPS  )

$50,480

19

Intel (Nasdaq: INTC  )

$82,620

46

Data from Yahoo! Finance and Thomson ONE.

It's not even close.

There are plenty of reasons why more analysts cover the bigger firms: There's more news, more interest, and more of an opportunity for the firm to make a market in the security. However, those reasons don't include any chance that large caps offer more gains for the individual investor.

In fact, it's exactly the opposite!

The Foolish bottom line
You can make money investing in a basket of carefully chosen, small, underfollowed companies. That's what we do at Hidden Gems. You can learn more about our specific strategies and recommendations for free for 30 days. Click here for more information.

This article was originally published on June 17, 2006, as "Stocks With Promise That Wall Street Ignores." It has been updated.

Neither Tim Hanson nor Brian Richards owns shares of any company mentioned in this article. United Parcel Service is a Motley Fool Income Investor recommendation. Intel is an Inside Value recommendation. No Fool is too cool for disclosure, and Tim and Brian are as cool as the other side of the pillow.


Read/Post Comments (2) | Recommend This Article (1)

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 October 13, 2008, at 12:46 PM, lawyerboy40 wrote:

    It is disingenous to imply that Hidden Gems covers CRZ. As an HG subscriber, I asked for insight into CRZ a couple of times with no response from a TMF analyst. I then had to watch CRZ drop from 3 per share to .68 per share. No news, no comments, nothing. Perhaps, the writer of this marketing piece should cite stocks that HG actually chooses to cover and discuss?

  • Report this Comment On October 24, 2008, at 11:40 AM, mf2006 wrote:

    I am not sure that the piece is intentionally disingenuous, but some non-subscribers may be misled.

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