The market's best stocks come from all kinds of industries. The 20 best stocks of the past 10 years, for instance, ranged from oil refiner (Frontier Oil (NYSE:FTO)) to truck manufacturer (Oshkosh Truck (NYSE:OSK)) to waste manager (Clean Harbors (NASDAQ:CLHB)).

Though they operated in different industries, they each started:

  • Small.
  • Underfollowed.
  • Financially strong.
  • Well managed.
  • Dominant in their market niche.

If those five criteria seem like a killer combination, they are. They are also the same qualities that Starbucks (NASDAQ:SBUX), Southwest Airlines (NYSE:LUV), and Home Depot (NYSE:HD) possessed early on. And those are some of the best stocks of our generation.

That's why Fool co-founder Tom Gardner uses these very criteria to pick out stocks for Motley Fool Hidden Gems subscribers. After all, it stands to reason that the best stocks of the next 10 years will also possess these traits.

Try it on for size
A few months back, I screened for companies that fit this model and came across Sun Hydraulics (NASDAQ:SNHY), a $250 million manufacturer of hydraulic products.

I was intrigued, but I decided to put it to the test before I bought shares:

  • Sun Hydraulics is small, but is it underfollowed? Yep. Only four Wall Street analysts currently cover it.
  • Is it financially strong? Sure is. The company has turned a profit every year since it went public in 1994, and the balance sheet boasts $11 million in cash to just $4.2 million in debt. Plus, Sun has a steady track record of free cash flow and pays a healthy 1.8% dividend.
  • Is it well managed? CEO Allen Carlson has been with the company since 1996 and has served as the CEO since 2000. Under his leadership, Sun's stock is up 500% and earnings have grown 250%. What's more, co-founder and longtime chairman and CEO Robert Koski continues to serve as a company director and owns 30% of the outstanding shares.
  • Finally, is it dominant? Sun competes with Sauer-Danfoss and Textron, but posts better operating margins and return on equity than the two larger firms. Moreover, in 2006, both Fortune and BusinessWeek listed Sun as one of the fastest-growing small companies in the United States.

With all five criteria satisfied, I went ahead and made a purchase (abiding by Fool trading rules, of course). Only time will tell whether the purchase was a good one, but Sun certainly possesses the qualities of a great stock.

So if it looks like a duck, and quacks like a duck ...

... It must be a duck
The next time you find a stock that sparks your interest, put it through this test. Not only will it help you separate the wheat from the chaff, it just might be all you need to improve your returns.

Still need some help finding quality ideas? Those five criteria have helped Tom and the Hidden Gems team find good small-cap stocks. The strategy has worked -- Hidden Gems picks are currently beating the market by 27 percentage points since inception in 2003.

You can have full access to Hidden Gems for 30 days, on the house. In addition to receiving two new picks each month, you can scour all of the team's research on more than 50 stocks. Simply click here for your free trial to Hidden Gems. There is no obligation to subscribe.

Todd Wenning also enjoys obscure movies from the early '90s, like "Airborne," which was filmed in his hometown of Cincinnati. He owns shares of Sun Hydraulics and Starbucks. Home Depot is a Motley Fool Inside Value choice. Starbucks is a Stock Advisor choice. Like Mitchell Goosen, the Fool's disclosure policy is stylin'.