The 10 best-performing stocks of the last decade were obscure, ignored, and small. But what about the top 25? The top 50? The top 100?
It turns out that most of the stock market's greatest performers of the past 10 years were also obscure, ignored, and small.
Small stocks for big returns
There were 325 stocks that could have earned you greater than 20% annualized returns over the past 10 years -- turning a $10,000 initial investment into more than $60,000. Of those 325 stocks, 296 of them were small caps. That's more than 90%. While the companies run the gamut from electronics retailer Best Buy (NYSE:BBY) to construction materials firm Florida Rock (NYSE:FRK), the common thread is size.
Ten years ago, Best Buy was a $1 billion company. Today, it's worth more than $20 billion. Florida Rock grew from $300 million to $3 billion.
There were only 29 mid- or large-cap companies that would have given you the same growth, and they're the cream of the crop: Dell (NASDAQ:DELL), Target (NYSE:TGT), and Apple (NASDAQ:AAPL), to name three. But you won't find Wal-Mart (NYSE:WMT) or Microsoft (NASDAQ:MSFT) on the list. That's because it's very difficult for larger companies to generate the same kind of growth as small caps. Target, for example, had an amazing run, growing from a $6 billion valuation to a $48 billion valuation. In that light, Wal-Mart's run from $60 billion to $190 billion doesn't seem that impressive -- $130 billion of value creation and it's only a triple. Former small-cap Best Buy, of course, trumped them both.
The Foolish bottom line
Small caps are one area of the market where the individual investor has the opportunity to earn phenomenal returns, but there are also pitfalls. For every one of the 296 small caps that could have earned you greater than 20% annualized returns over the past 10 years, there were quite a few more that didn't make it. Small-cap stocks tend to carry considerably more risk than large caps, so investors must consider their investments very carefully.
That's why we advocate a diversified portfolio of select small caps for Motley Fool Hidden Gems subscribers. By focusing on factors like superior management and a strong balance sheet and enjoying the benefits of diversification, our small-cap recommendations have outperformed the market by 27 percentage points since we started.
Click here if you'd like a 30-day free trial of our service. While there's no obligation to subscribe, every investor should have at least some smart exposure to small caps. The historical profits are just too good to pass up.
Dell and Best Buy are Stock Advisor recommendations. Microsoft is an Inside Value recommendation.
Tim Hanson does not own shares of any company mentioned. No Fool is too cool for disclosure . and Tim's pretty darn cool.
