"Over the years, small-cap stocks crush their large- and mid-cap peers."
That's how I planned to open today. Heck, I'd be making my case by now -- dropping names like Nagel and Quigley among 70 years' worth of data from Ibbotson.
But you're no dummy
And by now my inbox would be full. "Your results are skewed by abnormal years," you'd be shouting, or "What about survivorship bias?" And you would be right. You would have found the fatal flaw in all historical data: The future is not the past.
So forget the big numbers
Fortunately, you don't need Excel to prove that tomorrow's big winners are small caps today. You just need these three clues. It's a pretty safe bet that tomorrow's Google (NASDAQ:GOOG) -- heck, even tomorrow's General Electric (NYSE:GE) -- is ...
- Run by entrepreneurial zealots with ownership stakes.
- Free of convoluted relationships with investment banks.
- Able to grow its sales and cash flow exponentially.
And because it's off Wall Street's radar (for now), there will be pent-up demand when those revenues rocket and analysts catch on.
Get in on the ground floor
My father once told me to "be your own boss and die rich." He had a point. Sure, we cashed in on Wal-Mart (NYSE:WMT) and took a juicy bite out of Apple (NASDAQ:AAPL), but we didn't do nearly so well as their earliest investors, Sam Walton and Steve Jobs. This is nothing new: Heck, the nearer you got to Henry, the sweeter your investment in Ford Motor.
Sadly, few of us build empires or even place seed money or venture capital. But we can get in early. We just need to be patient and pick our spots. Or take a cue from Tom Gardner'sMotley Fool Hidden Gems method and seek out companies with market caps below $2 billion offering:
- Solid management with big stakes
- Great, sustainable businesses
- Dominant positions in niche markets
- Sterling balance sheets
- Strong free cash flow
Remember those five keys
In the '90s, they led folks straight to Intel (NASDAQ:INTC) and Schwab (NYSE:SCH) -- and to absolutely ridiculous gains. Decades earlier they brought our parents to Disney (NYSE:DIS). In just the past two years, they have led the Hidden Gems gang to a half-dozen stocks that doubled in value or more.
This choppy market could be your chance. Market malaise -- even blatant weakness -- can be seasonal and indiscriminate. When it hits, you want to have a wish list of great small companies to buy on coming dips. I have mine right here.
If you need some help putting your list together, Tom Gardner is offering a 30-day free trial to Hidden Gems. It could be the thing for you. Of course, there is no obligation or pressure to subscribe. Click here to learn more.
This article was originally published on May 10, 2005. It has been updated.
Paul Elliott no longer owns (sadly) any of the stocks mentioned here. The Motley Fool has a disclosure policy.
