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One Bet You're Sure to Lose

Austin Edwards
April 6, 2010

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 two 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 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 performing stocks of the past 365 days.

Lately, folks have been listing tech names like (Nasdaq: AMZN  ) and Baidu (Nasdaq: BIDU  ) . Granted, both have had good runs over the past year, but neither is even among the 30 top-performing large caps ...

 Large-Cap Stock (>$5B)

Market Cap

52-Week Gain

Rank Among Large Caps

Dendreon (Nasdaq: DNDN  )

$5.4 billion


No. 4

MGM Mirage (NYSE: MGM  )

$5.9 billion


No. 11

Host Hotels & Resorts (NYSE: HST  )

$9.9 billion


No. 19

Hartford Financial (NYSE: HIG  )

$11.3 billion


No. 21


$10 billion


No. 23

Source: Google Finance, as of April 6, 2010.

Now, let's have a look at the top 10 performing small caps ...


Market Cap

52-Week Gain

Somaxon Pharmaceuticals

$215 million


Diedrich Coffee

$199 million


Dollar Thrifty Automotive Group

$995 million


Dana Holding Corporation

$1.7 billion



$74 million


Valassis Communications

$1.4 billion


Keryx Biopharmaceuticals

$176 million


Orient Paper

$129 million


Sport Chalet

$43 million



$1.4 billion


Source: Google Finance, as of April 6, 2010.

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 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 major competitors will spring up any time soon.

Meanwhile, Innophos makes specialty phosp