The Market's 10 Best Stocks Revisited

Like you, I want to find the market's best stocks.

That's why last year I was working on a column just like this one. I wanted to know the names of the greatest stocks of the past decade, and I wanted to know what we could learn from them.

The results surprised me.

Taking stock of great stocks
The top 10 performers from 1996 through 2005 were all:

1. Obscure
2. Ignored
3. Small

While I expected names like Apple Computer, my research revealed Hansen Natural and Pool Corp.

Now that 2006 is over, I thought it'd be worthwhile to take stock of another decade: 1997 through 2006. Without further ado, the top 10 performers:

Still what they used to be
Hansen Natural and Chico's remain the top two stocks -- even as Chico's was cut in half in 2006.

Even if the results are less shocking, the takeaways are the same. The best stocks were all small companies 10 years ago, and they were ignored by most of Wall Street. Best Buy, for example, was just a $460 million retailer in 1997. It had 272 stores, did $7.8 billion in revenue, and became the first national retailer to sell DVD hardware and software.

Today, the company has more than 1,100 stores. It should post $40 billion in revenue this year. Talk about a great small-cap growth story.

Look where Wall Street won't
Now, how many investors are searching for market-beating gains in Best Buy today? Twenty-six analysts cover the company, even though its best growth days are behind it.

But where were they 10 years ago?

They were covering large caps. That's because large caps are the only stocks with enough volume and liquidity to make research worthwhile for firms that have a lot of money to invest. Unfortunately, the best-performing large caps of the past 10 years simply don't stack up against the small caps:

And neither do the mid caps:

The Foolish bottom line
You, however, have the opportunity to make serious money by identifying and investing in stocks that are:

1. Obscure
2. Ignored
3. Small

Some of these may even become the 10 best stocks of the next 10 years. Uncovering those winners is precisely our goal at Hidden Gems. Rather than concentrate on Best Buy, we unearth small retailers such as $1.3 billion Zumiez.

But a $1.3 billion company is probably still too big to be one of the best when we look back in 2017. That's why we also find Tiny Gems -- promising companies capitalized at less than $200 million.

To take a look at all of the small and micro caps we're following, including our today's two brand new picks, click here to try Hidden Gems free for 30 days. You may not have heard of our companies, but just like last year, that's exactly the point.

This article was originally published on Dec. 29, 2006. It has been updated.

Tim Hanson does not own shares of any company mentioned. Time Warner, American Eagle, and Best Buy are Motley Fool Stock Advisor recommendations. Wal-Mart, Best Buy, and Home Depot are Inside Value picks. No Fool is too cool for disclosure.