Before I came to work at the Fool, I always assumed that a search for little-known companies would require me to scour society's unloved underbelly, searching in dark crevices for the company that makes luxury nose-hair trimmers or develops the little magnetic strips on credit cards or manufactures the crayon sharpener in the big pack. Little companies that do little things.
But it turns out that in the quest for the small companies that will someday turn into really big companies -- the next Wal-Mart or Microsoft or Starbucks or whatever -- we aren't limited to operations that are running out of someone's garage. With a market cap range of $200 million to $2 billion for formal recommendations in the Hidden Gems newsletter service, there's an incredible variety of "real" companies to pursue in the hopes of finding one (or a few) that will provide market-thumping returns as they grow.
Right now, these companies are mostly underfollowed by analysts, undervalued by investors, and flying comfortably beneath Wall Street's radar. But we don't necessarily have to troll the waters of obscurity to find small-cap winners. There are plenty of businesses valued under $2 billion that are well-run and shareholder-friendly, that are increasing sales at least 15% annually -- and that I've heard of! So I get to combine the potential magic of small-cap investing with Peter Lynch's commonsense brilliance of buying what I know.
A quick screen turned up quite a few promising prospects.
A bouquet of well-known small caps
You've been there before. Your anniversary is somehow -- completely without warning -- tomorrow and you need to prove that you were not only aware, but anticipating the event. So you make a quick call to 1-800-Flowers
Later, when you finally realize that there are ways to remember anniversaries and birthdays, you key those big days into your Treo, the do-everything machine from Palm
"Last month, longtime rivals Microsoft
"Is this for real? Yes, it's for real, and we can only marvel at the prospect. Old rivals Microsoft and Palm are an unlikely, but welcome pairing. Palm's very popular Treo smartphone, coupled with Microsoft's mobile OS -- with its myriad multimedia capabilities running over Verizon's high-speed wireless broadband network -- is a compelling combination. ... The new Treo smartphone bodes well for corporate and consumer users. They will be getting the best of the best. Microsoft has had limited success with its Windows Mobile OS and has not been hugely successful in the PDA market. And Palm's decision to support Windows Mobile 5.0 on its device is a clear nod to Microsoft's continued dominance of the desktop operating space. It makes absolute sense that the firms would combine these two best-of-breed products into a single offering."
And yes, with a market cap of $1.4 billion, Palm is a small-cap company (although its omnipresent technology might lead you to believe it's already much, much bigger).
Small caps for your progeny
If you have a kid in college, you are most likely aware of Blackboard
OK, one more. Parents of younger kids are not only aware of LeapFrogEnterprises
There are thousands of smaller companies that want to make the leap into the realm of the big boys, both hidden and obvious. Fool co-founder Tom Gardner offers up two great options every month in Hidden Gems, and with a free, no-obligation 30-day trial, you get access to each one of his selections since the newsletter's inception. (To date, those recommendations are besting the S&P 500 by more than 20 percentage points.) Take a look and find the best companies you've never heard of and the best little companies you thought had already made it big.
Roger Friedman is the managing editor of newsletters and the author of Nipple Confusion, Uncoordinated Pooping and Spittle: The Life of a Newborn's Father . He does not own shares of any company mentioned in this article. Microsoft and Mattel are Motley Fool Inside Value recommendations. Palm is a Motley Fool Stock Advisor recommendation. The Fool has a disclosure policy.