For small-cap investing aficionados, there are two annual magazine features to watch for. One is the 200 Best Small Companies list from Forbes, and the other is Business Week's Hot 100 list of best small growth companies, which most recently came out in the issue dated June 11. Of course, I ran right out and picked up a copy.

Subscribers to our Foolish 8 spreadsheet or Motley Fool Select investing publication will notice that a lot of past and present Foolish 8 companies make the Business Week list. This is as it should be, as Business Week goes about compiling its list using sales and earnings growth, which combine for half of a company's ranking. Since the Foolish 8 list requires that companies must have sales and earnings growth of 25% or higher, there's some overlap in the companies selected by the two methods.

In this year's feature, Business Week ran a short look-back feature to the '99 list. This got me thinking that it might be interesting for a small-cap investor to research some of the past lists to see what conclusions he or she can draw from them. The Business Week list is a perfect tool for this, for a couple of reasons. 

First, because it is an annual list, it is much easier to calculate historical returns than for the Foolish 8 lists, which come out each month. In addition, the Business Week list offers a much larger sample size. In any case, I went back to our library here at Fool HQ and pulled out the May 31, 1999 issue and started studying some of the companies included to see how they've fared in the past two years.

It occurred to me as I looked through the 1999 list that those companies that have continued to grow should still be on the 2001 list. After all, it's only been two years. Further, I would guess that those companies still on the list after two years would probably have turned in some excellent returns. Here's what I found:

Of the companies on the Hot 100 list in 1999, only 11 are on the list in 2001. That's right -- only 11% made it back on the list just two years later. I don't know about you, but I find that to be a surprisingly low percentage.

As for the returns of this group, if you had put $1,000 in each of these 11 stocks on June 1, 1999, and held them through June 15, 2001, you'd have $17,036.71. That's pretty good -- a 54.8% return in two years. As a comparison, the Nasdaq Composite has lost 16% and the S&P 500 has lost 6.2% (not counting dividends) in the same time period. Still, of the 11 companies that survived to make the list again in 2001, you would have lost money in four of them. 

One of the more interesting companies in this group is Brass Eagle (Nasdaq: XTRM). Brass Eagle makes paintball guns and equipment. The company has this to say on its website:

"Paintball has become one of the fastest-growing outdoor recreational sports in America. As more and more people experience the fun and excitement of paintball, the game's following continues to grow at double-digit rates. The emotional appeal and fast-paced action of this high-octane competition places the game squarely at the leading edge of today's exploding category of 'Extreme Sports.'"

I don't know about you, but I was surprised that the sport of paintball could actually support a publicly traded company -- but there you have it. Brass Eagle's net income was $8.2 million in 1998 and in 1999 and $8.7 million in 2000. Sales for those years were $75.1 million, $68.2 million, and $86.8 million, respectively.

The problem with having a company like Brass Eagle on the Hot 100 list of growth companies is obvious: Unless paintball becomes so popular that it becomes woven into the fabric of everyday life for most Americans, we're dealing with a very small market that isn't growing all that fast.

I played paintball once, and it's a lot of fun, especially if you don't get shot (those things hurt like $%^* when you get hit with them). But Brass Eagle was a $180 million company in 1998 -- can we reasonably expect it to become a $500 million or $1 billion company in a couple of years? I think the answer is plainly no. If you'd put $1,000 into Brass Eagle in 1998, you'd have $479 now. And that's in spite of the company doing pretty well. Today, Brass Eagle has a market cap of $64 million -- and I consider that to be a pretty good accomplishment.

Before you invest in a small growth company, ask yourself this question: If everything goes right, can this small company become a big company? If the answer is no, then you've limited your potential gains right there. Paintball is just not going to become a multibillion-dollar industry, and if paintball goes out of fashion and everyone decides to start playing sumo football instead, Brass Eagle is going to be in trouble.

I'll be back next week with more reflections on the Business Week list of hot growth companies. I'm also going to invite Bill Mann out for some paintball -- I've been looking for a chance to take a couple of cheap shots at that guy.

Zeke Ashton hopes to never play sumo football. To see Zeke's holdings, view his online profile. The Motley Fool is investors writing for investors.