1 Great Stock That Analysts Snub

Small-cap stocks.

Herein lies one of your greatest advantages as an individual investor. You have the energy, the latitude, and the time to look at small-cap companies that the bigwigs on Wall Street don't have patience for. Frankly, stocks that analysts hate or disregard are more intriguing to me than the ones they love.

Love the ones they hate?
A recent Wall Street Journal article detailed how investors would have fared last year had they put their money in analysts' 10 most highly rated stocks versus 10 of their least favorite. The least favorite stocks outperformed the others by an outstanding 8 percentage points. In just one year. But maybe that was a fluke. So they checked out 2009 and performed the same test. The results: The least favorite 10 stocks returned 70%, while the favorites returned 22% -- quite a stark contrast.

So I decided to go one step further and try to find companies with little to no analyst coverage. I figured if they were that dreadful at picking bad stocks, they would probably be even worse at overlooking small caps that were ripe for picking. Because the truth is, analysts just don't have time to look at small-cap stocks like they do the blue chips, and the fewer people looking into a stock, the better chance you have at finding a price discrepancy.

Think about it. If only you and several thousand other individuals are analyzing a stock -- no Wall Street investors with their fancy financial models, extensive research reports, and access to executives -- then there's a good chance you can find a great, small stock at a spectacular price.

In fact, even Peter Lynch, famed money manager for Fidelity's Magellan Fund, has said that small-cap stocks are highly desirable. From his book One Up on Wall Street, he states, "These are among my favorite investments: small, aggressive new enterprises that grow at 20% to 25% a year. With a small portfolio, one or two of these can make a career.”

Should you stay away from the big guys?
You might think then that I'm advocating staying away from bigger name companies with lots of analysts, but I'm definitely not. In fact, last April, I made the mistake of ignoring two companies, Netflix (Nasdaq: NFLX) and Baidu (Nasdaq: BIDU), because I thought they were overbought and overanalyzed (both have well over 20 analysts estimating annual figures for them). They had seen huge run-ups, and my instinct told me to steer clear of them. However, since last April, Netflix has more than doubled, and Baidu has surged more than 85%.

So yes -- stocks with massive analyst coverage can of course do well. They can exceed our expectations. But over the long run, I am positive that if you can nab just one or two small-cap stocks that turn out to be real home runs, you can set yourself up for great financial success.

Let's take a look at five
In order to help you get started, I decided to screen for stocks that had little or no analyst coverage -- these are the dorks, the dweebs, the last kids to get picked in gym class. With my results, I decided to screen even further, and limited my results to companies with a market cap of less than $1 billion and that have been able to increase their revenues over the past three years by at least 100% annually. The results are listed below:

Source: Capital IQ, a division of Standard & Poor's.

Today I'm going to focus solely on Contango Oil & Gas, a small company involved with the exploration and production of oil and natural gas offshore in the Gulf of Mexico. The company first came to my attention last year, when our own Fool contributor Toby Shute mentioned it as a great buy recommendation. Since that time, the stock has gone up by 32% -- more than the 22% gain of the Dow Jones Industrials, but not so much to scare me away.

The company was founded by CEO Ken Peak in 1999, and since that time, it's been one of the decade's best performing stocks. Peak believes that there are no huge competitive advantages in a highly commoditized business, and so he strives to be the lowest cost producer by outsourcing almost every facet of his business. The company has just eight employees. It chooses its suppliers and business partners with care and uses intelligent incentives to ensure efficiency and productivity.

As you would expect from a frugal-minded CEO, Contango carries $63.7 million in cash and absolutely zero debt on its books, almost unheard of in a world where E&P companies leverage up to drill more wells in the race for further reserves. Simply put, this is a rock-solid balance sheet. This conservatism allows the company to undertake sizable yet appropriate risks, where it's had success in the Gulf and with investments in LNG and shale gas. These risks, while hedged, are reasons why the company has been able to grow revenues by 189% annually over the last five years and consistently boost earnings.

In addition, if you're like me and think that natural gas is due for a rally, then Contango could be a great way to play the hand. The large majority of its production is dedicated to natural gas or natural gas liquids, and it plans on getting ahead by placing its future straight in line with the natural gas trend.

The foolish bottom line
Analysts can snub small-cap companies like Contango Oil & Gas all they want. It gives me, the small investor, the time and breathing room to do my due diligence and make informed decisions -- without all the noise and distractions of Wall Street. And as Peter Lynch and countless others have illustrated, it only takes one home run to strike it rich, so what better place to start than small-cap stocks.

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