Just like fishermen, investors love to tell tales of "the stock that got away."
We speak remorsefully about the stocks that could have, would have, or should have made us a fortune -- if only we had made an investment.
Maybe you were an early customer of Best Buy (NYSE:BBY) and American Eagle (NYSE:AEO) in the 1990s, but didn't invest in either back then. Now, each time you hear that they're two of the market's 10 best stocks over the past decade, you wish you could time-travel back to 1997 and invest just $1,000 in each company. Today, those tiny investments would be worth $31,020 and $35,600, respectively.
Sadly, the flux capacitor is fictional.
Mustard seeds
"The stock that got away" is usually a small company that made it to the big leagues; which makes sense, because those are the stocks with the most room to grow. You simply don't hear stories about people missing the boat on megacaps like DuPont (NYSE:DD). Unless the storyteller was born in 1902.
That's because, while large companies like these may have many years of steady growth ahead of them, their high growth stages have long since passed.
Johnny-come-lately
One of the worst things an investor can do is invest in "the stock that got away" after it has reached large-cap status, thinking it will repeat its past performance. The law of diminishing returns makes this a very difficult feat.
Consider:
|
Return 1987-1997 |
Return 1997-2007 | |
|---|---|---|
|
Cisco Systems (NASDAQ:CSCO) |
10,387%* |
242% |
|
Amgen (NASDAQ:AMGN) |
2,261% |
295% |
|
Medtronic (NYSE:MDT) |
1,753% |
148% |
While the most recent returns for these companies are nothing to scoff at, they pale in comparison to their previous 10-year returns.
Catch the next one
The good news is there's no need to dwell on "the stock that got away" -- tomorrow's big catches are out there right now, masquerading as small caps. The problem is, it can be hard to locate tomorrow's winners among the thousands of small companies on the market.
To get started, look for companies that have founders with large personal stakes, little or no debt on their books, and dominant positioning in their market niche. These are some of the criteria Fool co-founder Tom Gardner and the Motley Fool Hidden Gems team use to select small-cap stocks for their subscribers. That tack works -- since July 2003, their strategy has outperformed the market by 38 percentage points.
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This article was originally published on Jan. 25, 2007. It has been updated.
Urban Outfitters was the one that got away from Todd Wenning. He does not own shares of any company mentioned. Best Buy and American Eagle are Motley Fool Stock Advisor choices. The Fool has a disclosure policy.
