If you believe that markets are inefficient -- as do most of us here at the Fool -- then you can benefit from investing in small-cap stocks. Which stocks do you think the market is more likely to undervalue -- big blue chips like General Electric (NYSE:GE) or Wal-Mart (NYSE:WMT) that have entire armies of Wall Street analysts watching their every move? Or sleepy, relatively underfollowed small caps like Middleby (NASDAQ:MIDD) or SyneronMedical (NASDAQ:ELOS)?
Basic mathematics also favors small-cap stocks. Regardless of how well a top blue chip like Citigroup (NYSE:C) -- with its $250 billion market cap -- might perform in a year, it's unlikely (actually, it's utterly impossible) for it to become a 25-bagger over the next five years, as Urban Outfitters (NASDAQ:URBN) did from 2000 to 2005.
So if it's high returns you're after, then small caps represent a great opportunity. Alas, the quest for sizable returns usually involves taking on considerable risk. So the small-cap investor should be prepared to devote a lot of time to researching potential stock ideas.
That's where we come in.
With the help of our 15,000-member-strong Motley Fool CAPS community, we're aiming to identify those small-cap stocks that have multibagger potential for the next five years. Our search began by looking for companies with market caps of less than $3 billion that have earned five stars from our CAPS community. We then put together a list of 15 candidates that represent some of the best investment ideas out there.
These lucky few are a diverse group, among them outstanding companies such as medical-products provider Syneron Medical, oven maker and Motley Fool Hidden Gems selection Middleby, and the steadily growing mattress manufacturer Tempur-Pedic (NYSE:TPX).
Below, you'll find an analyst making the case for each of our 15 small-cap stock ideas. If you agree with the analyst, then rate the stock an "outperform" in CAPS. If you disagree, rate it an "underperform." If you like, you can even add your own pitch. The small cap with the most new, net outperform ratings (outperform ratings minus underperform ratings) will win the contest.
By early next week, we'll have declared a winner. To begin the quest for the best small cap of 2007, start reading the analyses below and then click here to join CAPS today.
- Atheros
- Walter Industries
- Dawson Geophysical
- FormFactor
- Texas Roadhouse
- Syneron
- Portfolio Recovery Associates
- KongZhong
- Tempur-Pedic
- Encysive Pharmaceuticals
- Volcom
- American Science & Engineering
- Pan American Silver
- Labor Ready
- Middleby
John Reeves does not own shares in any of the companies mentioned. Wal-Mart is an Inside Value pick. The Fool is investors writing for investors.
