3 Home Run Stocks for the Next Decade

My friend's father has the kind of story you see in the movies. He invested his first real estate commission in Microsoft back in the early '90s, when the stock was trading for less than $10 a pop, and cashed in his lottery ticket before the bubble burst in 2000.

I tried to pick his brain for stock picks, but by now, he's content collecting dividend checks and living the good life. I came away from the conversation wanting more than anything to find the next Microsoft -- the stock that could secure my financial future the way it did his.

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It only takes one great stock
In investing as in baseball, just one home run can completely change the game. You may own five or 10 stocks that provide average or even negative returns -- but if you manage to find that one diamond in the rough, you can more than compensate for anything else your portfolio serves up.

David Gardner, co-founder of The Motley Fool and advisor for our Rule Breakers service, is a great advocate of finding out-of-this-world stocks. He doesn't always worry about price-to-earnings ratios or margins of safety. Instead, he looks for companies that are totally changing the industries in which they compete.

He'd be the first to admit that not all of his picks turn out the way he'd like -- there are definitely some laggards in the Rule Breakers portfolio -- but then there's a company like Intuitive Surgical (Nasdaq: ISRG). David has recommended Intuitive four times, and it's up more than 700% from his original recommendation. Intuitive Surgical is a great company, and it's expected to grow earnings by 25% over the next five years. Although it's now a $14 billion mid-cap, it still has plenty of room to run -- but think about what a great return you would have seen had you gotten involved with Intuitive when it was still a small company getting ready to roar.

Getting the perfect pitch
Peter Lynch, known for telling investors to invest in what they know, acknowledged the power of fast-growing companies. He said high-growth stocks were "among my favorite investments: small, aggressive new enterprises that grow at 20%-25% a year." Of course, these types of stocks can be risky, but Lynch recognized that "one or two of these can make a career."

If you could identify some of the characteristics of home run stocks right before they took off, surely you'd have a much better chance at finding stocks for the next decade. Let's look at some of the market's recent darlings, and see how they stacked up in some key metrics in the year or so prior to their surge in share price:

As you can see, these companies not only grew their revenue and earnings at tremendous rates, but also generated strong returns on equity -- a great sign of management's ability to allocate capital. It's no coincidence that stocks have each seen multibagger gains since the year prior to their takeoff.

In addition, these are all companies that have managed to stay ahead of the curve. Baidu, for example, has been helped with its massive market share in China and its ability to stay in the government's good graces. Netflix is making a smooth transition from a mail-order DVD company to a comprehensive online streaming service. These are all home run companies of the past that continue to deliver, and will most likely outperform in the future as well.

Sluggers for the next 10 years
Now equipped with some guidelines on my hunt for the next big stock, I ran several screens looking for companies with similar qualities. It's important to note, however, that you have to find them before everyone else does, which often means finding them while they're still small and unknown. In addition, I felt it was necessary to search for companies with strong insider ownership. When the execs have their own money on the line, they're more likely to act in shareholders' best interest.

That being said, let's see which three companies made the list for the next decade:

Each of these companies has the essential attributes of a potentially earth-shattering stock: small market caps, fantastic revenue growth, bottom-line profits, and fabulous returns on equity. In addition, they all have inside ownership of at least 16% -- a comforting factor when considering your next big purchase.

Lumber Liquidators is a great place to start your research. This small-cap has 9% market share in the hardwood flooring segment -- which may not sound like a lot, but it's by far the most in the industry. It's also large enough to help Lumber generate about $545 million in annual sales. The company has been on a expansion spree, doubling the number of stores in the past three years, and who can blame them? The average store costs $280,000 to open, but typically rakes in about $3.8 million a year. With huge upside, absolutely no debt, and endless economies of scale, Lumber is bound to see a huge bounce in its stock price -- and our Rule Breakers analysts think it's only a matter of time.

So if you're looking for the next Baidu or Netflix, Rule Breakers is a great place to start. David Gardner has an amazing track record (he and his team have beaten the market by 27% since inception in 2004), and he consistently finds stocks that can take your portfolio to the next level.

Fortunately, right now, you can see all of his past and present recommendations. We're currently offering a free, 30-day trial to the service -- no strings attached. Click here for more information.

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Fool contributor Jordan DiPietro owns no companies mentioned in this article. Microsoft is an Inside Value pick. Baidu, Intuitive Surgical, and Lumber Liquidators Holdings are Motley Fool Rule Breakers selections. Netflix and NVIDIA are Motley Fool Stock Advisor picks. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool's disclosure policy is always looking for the next big stock.