"Over the years, small-cap stocks crush their large- and mid-cap peers."

That's how I planned to open today. By now, I'd be making my case -- 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 numbers are skewed by a few abnormal years," you'd be shouting, or "What about survivorship bias?" And you'd be right. You'd 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 tell you that many of tomorrow's big winners are small fries today. All you really need is a few clues to find them. After all, history tells us that the next Microsoft (NASDAQ:MSFT) is very likely ...

  1. Run by entrepreneurial zealots with ownership stakes.
  2. Free of convoluted relationships with investment banks.
  3. Able to grow its sales and cash flow exponentially.

And because it hasn't hit Wall Street's radar (yet), there will be pent-up demand when those revenues rocket and analysts catch on.

Get in near the ground floor
My father once told me to "be your own boss and die rich." He had a point. Tech investors cashed in on Oracle (NASDAQ:ORCL) and Dell (NASDAQ:DELL). But few ever did so well as founders Larry Ellison and Michael Dell. Of course, this is nothing new: The nearer your great-grandfather got to old Henry, the sweeter his investment in Ford (NYSE:F).

Sadly, most of us don't build empires, plant seed money, or ever encounter pure genius. But that's the beauty of stocks. We can still get in early. We just need to be patient and pick our spots. Or take a cue from Tom Gardner's Motley Fool Hidden Gemsmethod and seek out companies with market caps below $1 billion offering:

  1. Solid management with big stakes.
  2. Great, sustainable businesses.
  3. Dominant positions in niche markets.
  4. Sterling balance sheets.
  5. Strong free cash flow.

Just remember those five keys
In the early '90s, they led folks to Intuit (NASDAQ:INTU) -- and ridiculous profits. They led me and my pals to American Eagle Outfitters (NASDAQ:AEOS) and Abercrombie & Fitch (NYSE:ANF) and 1,000% gains. In just the past two years, they have led the Hidden Gems gang to a half-dozen stocks that doubled in value or more.

(In the spirit of full disclosure, I'll give you the whole story. As of Oct. 3, the Hidden Gems picks are up an average of 27.2%. For context, compare that with 9.7% if you'd bought the S&P 500 instead.)

Believe me, October is notoriously volatile even in "normal" years. Stocks go on sale without warning -- even great stocks -- for any number of reasons. This market could yet give you a second chance, and when it does, you want to have a wish list of great small companies to buy on dips. I have mine right here.

If you need some help putting your list together, this is your lucky day. Tom Gardner is offering a 30-day trial to Hidden Gems. It's free, and 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. Intuit is a Motley Fool Inside Value recommendation. Dell is a Motley Fool Stock Advisor recommendation. The Motley Fool has adisclosure policy.