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One Bet You're Sure to Lose

http://www.fool.com/investing/small-cap/2010/03/04/one-bet-youre-sure-to-lose.aspx

Austin Edwards
March 4, 2010

Four minutes from now, you and I will 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 stocks of the next 365 days; and give you the names of two stocks 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 stocks of the past 365 days.

Lately, folks have been listing airlines stocks like Delta (NYSE: DAL  ) and Southwest (NYSE: LUV  ) . Although both have had a good run over the past couple months, neither is even among the 30 top-performing large caps of the past year...

 Large-Cap Stock (>$5B)

Market Cap

52-Week Gain

Rank Among Large Caps

Human Genome Sciences

$5.1 billion

1,344%

No. 1

Mechel OAO (NYSE: MTL  )

$10.1 billion

563%

No. 4

Fifth Third Bancorp

$9.8 billion

433%

No. 8

International Paper (NYSE: IP  )

$10.8 billion

297%

No. 13

Dow Chemical (NYSE: DOW  )

$34 billion

280%

No. 15

Wipro Limited

$32.8 billion

265%

No. 18

Cliffs Natural Resources (NYSE: CLF  )

$7.7 billion

249%

No. 28

Source: Google Finance, as of March 4.

But don't forget, those are only the top-performing large caps. Which companies made the top 10 overall? Let's have a look ...

Stock

Market Cap

52-Week Gain

Diedrich Coffee

$200 million

6,820%

Dollar Thrifty Automotive Group

$666 million

4,131%

Orient Paper

$146 million

3,003%

Dana Holding Corporation

$1.6 billion

2,973%

Select Comfort

$445 million

2,467%

Pier 1 Imports (NYSE: PIR  )

$808 million

2,446%

Avis Budget Group

$1.1 billion

2,291%

Boise Inc.

$437 million

1,800%

Telestone Technologies

$176 million

1,745%

Valassis Communications

$1.3 billion

1,743%

Source: Google Finance, as of March 4.

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, 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