The World's 10 Best Stocks

To make money in the stock market, we must study the past to identify what strategies will work well in the future. That's why my colleague Tim Hanson has spent years evaluating the U.S. market's best-performing stocks.

While this environment has been tough for all of us, it's important to remember a few things. I conducted a five-year study for the years 2004 through 2008, and even over that rough period, there were 23 non-microcap multibaggers. Studying such success stories is our best way to learn how to make money in the future.

Of those 23 stocks, these were the top 10 performers:

Data from Capital IQ. Companies capitalized at more than $300 million as of Dec. 31, 2003.

That's a fairly select group, and some heady performance for this environment. But it turns out we can do better.

With these stocks
While there were just 23 domestic multibaggers over the past five years, there have been more than 100 foreign ones. In fact, all but three of the top 10 stocks in the world came from abroad.

Here's what that top-10 list looks like when we include foreign stocks:

Data from Capital IQ (a division of Standard and Poor's) and company websites. Includes companies capitalized at more than $300 million on Dec. 31, 2003, with verifiable stock-price histories.

The contrast is enormous when, for instance, we compare the five-year performance of Grupo Elektra, the Mexican banking and electronic retail giant, with those of its U.S. counterparts, Citigroup (NYSE: C) and Best Buy. While Citigroup continues to struggle -- despite posting a rare profit last quarter, North American revenue is less than half of what it was in 2006 -- Grupo Elektra's finance division has grown nearly 50% during that time.

The lesson is clear: If you restrict yourself to the U.S., you are going to miss out on many of the world's best stocks.

How come?
Many investors such as Warren Buffett note that our economy is too large and mature to enjoy the same growth rates that we have in the past. But that's not true of smaller, emerging economies.

That's one of the reasons why a few domestic blue chips like Intel (Nasdaq: INTC) and PepsiCo (NYSE: PEP) that operate in somewhat mature domestic industries rely on their foreign operations to generate most of their growth. Intel, which does more than 90% of its business abroad, has depended heavily on sales growth in Taiwan in recent years. While it experiences some weakness in North America and Europe, PepsiCo has been turning to India and the Middle East to fuel its growth.

It's also why Macao-based Melco Crown (Nasdaq: MPEL) has enjoyed more rapid sales growth than MGM (NYSE: MGM), or even fast-growers like Las Vegas Sands (NYSE: LVS) and Wynn (NYSE: WYNN), in recent years. In fact, the majority of Sands' revenue growth has come from its Macao properties. Over the past 12 months for which data is available, Melco's revenue has grown 46%, versus less than 10% for Wynn and Sands, and a 17% decline for MGM. If you own any of these domestic casino operators, Melco might be worth a look.

And when we compare the United States' GDP growth with those of the economies represented above, we see that fast-growing markets can produce tailwinds for investors:

Data from The World Bank and Yahoo! Finance.

According to The World Bank, emerging markets like these will continue to grow faster than developed economies. And you can bet these sorts of dynamic economies will yield some fantastic investments.

Here's one example
Take MercadoLibre, the Latin American eBay. While eBay has grown sales at an impressive 14% annual rate over the past three years, MercadoLibre's business is up a whopping 49% annually.

See, while the number of Internet users in the United States has doubled since 2000, South American Internet use has risen more than 600%. At present, only one-quarter of the continent's population has access to the Web, so there's still plenty of room for growth.

In addition, the governments of Uruguay and Brazil, MercadoLibre's largest markets, have committed stimulus funding for supplying laptop computers to public schools, while Google and HSBC will provide Wi-Fi to the region. As Internet usage increases and customers do more of their shopping online, MercadoLibre, now a virtual monopoly, will profit.

Our team of analysts at Motley Fool Global Gains agrees with Buffett that many of tomorrow's best profit-making opportunities will come from abroad. While we consider MercadoLibre fairly valued these days, it's just one example of the sort of opportunities we're seeing right now.

If you'd like some more stock ideas, feel free to look over our top picks and analysis with a free guest pass to Global Gains. Who knows? You might just see one of tomorrow's 10 best stocks listed there. Simply click here to get started -- there's no obligation to subscribe to anything.

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This article was first published on June 12, 2009. It has been updated.

Ilan Moscovitz owns shares of Melco, Apple, and Google. Apple, Best Buy, and eBay are Motley Fool Stock Advisor recommendations. Monsanto, Best Buy, and Intel are Inside Value picks. Google, Intuitive Surgical, and MercadoLibre are Rule Breakers recommendations. PepsiCo is an Income Investor pick. Melco is a Global Gains selection. The Fool owns shares of Procter & Gamble and Best Buy. Motley Fool Options recommended a diagonal call position on PepsiCo. The Fool owns a covered call position on Intel. The Fool's loquacious disclosure policy is among the top 10 disclosure policies in the world.