When 2007 wraps, which stock will be standing atop the mountain as the equity that offered the year's best returns?

If the market stopped moving today, the top three would be Life Partners Holdings (NASDAQ:LPHI), TBS International (NASDAQ:TBSI), and DryShips (NASDAQ:DRYS) -- three tiny companies that are up 374%, 332%, and 320%, respectively, year to date.

Of course, the market won't stop moving. These stocks have been rocked by recent market volatility, and they could see their returns slashed by year-end if that volatility keeps up.

But seriously, who cares?
In the grand scheme of things, one-year returns don't matter much.

[Keeping a straight face.]

OK. They don't, but they do ...

Who in their right mind wouldn't want to make five to 12 times their money and get to brag to everyone from the Dalai Lama on down that he found, bought, and held the best stock of the year?

Because if recent history is any indication, that's the potential the year's top stock offers:





Market Cap at Start of Year





$61 million


NutriSystem (NASDAQ:NTRI)


Internet retail

$85 million




Wireless telecommunication services

$292 million


Millicom International Cellular (NASDAQ:MICC)


Wireless telecommunication services

$87 million


Hecla Mining


Metals and minerals

$69 million


L-1 Identity Solutions (NYSE:ID)


Electronic equipment

$157 million


OSI Pharmaceuticals (NASDAQ:OSIP)



$171 million

Data from Capital IQ. Results exclude penny stocks.

Those are some heady returns from some very small companies, but that shouldn't be surprising. After all, the best stocks of the millennium, the past decade, and the last eight decades have also all been small caps.

Do you believe?
Even if you'd like to get your hands on the year's best stock, your investing goal should not be to do so explicitly. Instead, as we do at our Motley Fool Hidden Gems small-cap investing service, you should be looking for promising small caps that have growth potential for the next decade our more.

Could you hit upon the year's top stock in this search? Sure. Will you? It's not likely.

That's because the small caps we like to buy to hold are:

  1. Small
  2. Cheap
  3. Well-run by dedicated management
  4. Fiscally conservative
  5. Profiting from a wide market opportunity

To find those five traits together, we must often concentrate on overlooked, obscure, misunderstood, or distasteful businesses -- and avoid the sex appeal, optimism, and premium price tags of tech and biotech stocks that mostly comprise the above list.

Yes, these companies can be rewarding. Since its 2003 performance, Millicom International has run up another 375%. But because investors in these stocks have such high expectations, they can also drop in a hurry. FiberTower, L-1 Identity Solutions, and OSI Pharmaceuticals are down 71%, 29%, and 51%, respectively, since they posted their best-in-market performances.

If it happens, it happens
Your goal as an investor should not be to find this year's best stock, but rather to fill your portfolio with stocks that will grow steadily for many, many years to come. That's why you need value-priced small caps -- and if you happen to hit on the year's top stock, well, all the better.

You can take a look at all of the small caps we're recommending at Hidden Gems by joining the service free for 30 days. Click here for more information.

Tim Hanson does not own shares of any company mentioned. The Fool's disclosure policy is truly a 25-year-old Hawaiian organ donor.