It's a question that haunts investors: "How did I let that stock get away?"

We all have our own story. Many times, the stock was sitting right under our nose and we talked ourselves out of making an investment. Such a mistake can be discouraging, to say the least.

The important thing is not to give up searching for the next big stock. That's where Motley Fool CAPS can help. Our new stock screener, combined with the opinions of more than 97,000 investors participating in CAPS, can help you whittle down the list of potential winners.

It's a simple equation
In the short term, the market is unpredictable. In the long run, however, the market rewards companies that:

  • Consistently increase shareholder value.
  • Grow more quickly than their peers do.

For example, in 1972, Wal-Mart (NYSE: WMT) was a tiny retailer with 51 stores in five states. It had plenty of room to grow, and over the next five years, Wal-Mart began to show signs that it was going to be a major player:

Year

1972

1973

1974

1975

1976

Number of stores

51

64

78

104

125

Return on equity

27.0%

18.5%

20.0%

17.2%

23.7%

Source: Wal-Mart annual reports.

Wal-Mart's promise was difficult to miss. Not only was it expanding rapidly, but it was also generating solid returns on investors' equity year after year. Over the next 32 years, Wal-Mart sustained that performance in its business and generated 24.1% annualized returns for investors -- enough to turn a $1,000 investment in early 1976 into more than $1 million today.

So let's try it
Using the CAPS screener, I searched for highly rated small companies (less than $1 billion) that possess traits similar to what Wal-Mart had in its youth:

  • Return on equity greater than 15%.
  • Insider ownership greater than 10%.
  • Three-year annual sales growth greater than 15%.

Here are a few of the results:

Company

CAPS Rating (Out of 5)

Sector

Airvana (Nasdaq: AIRV)

****

Technology

Sun Hydraulics (Nasdaq: SNHY)

*****

Industrial Goods

Diamond Hill Investment Group (Nasdaq: DHIL)

****

Financial

VSE (Nasdaq: VSEC)

*****

Services

VASCO Data Security International (Nasdaq: VDSI)

*****

Technology

Data from Motley Fool CAPS, as of 4/17/08.

These stocks appear to be promising, but this is not a list of formal recommendations. Instead, use it as a starting point for further research.

Hello, old friend
This is a similar screen to the one I used for finding Sun Hydraulics for my own portfolio back in November 2006. After further examination of the stock, Sun passed my test with flying colors. In other words, it was:

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

Since then, Sun Hydraulics has nearly doubled, but it currently remains 20% off its 52-week high.

Does it still have room to run? CAPS investors sure think so -- of the 1,071 who have rated the stock, fully 1,062 (99%) of them believe it will outperform the S&P 500. 

In January, CAPS All-Star pencils2 noted Sun's strong corporate culture, growing overseas sales, and operating efficiency as reasons to remain confident:

Sun is doing something right, because since fiscal 2002 operating efficiency has strongly increased. The company's been a very consistent producer of cash flow as well as free cash flow over the past several years as well. ... And did I mention that insiders own 31% of all shares outstanding? I can't help but think this is a great time to buy a business that should do very well as economies around the globe develop and expand.

I'm a bit biased here, since I continue to own Sun shares. But with a PEG ratio of less than 1, increasing margins and return on equity, and a forward dividend yield of 1.2%, there's no excuse not to take a first or second look at Sun Hydraulics.

What do you think about Sun Hydraulics, or any other stock for that matter? Join the other 97,000 investors participating in Motley Fool CAPS today, and make your voice heard!

Sun Hydraulics is a Motley Fool Hidden Gems recommendation, Wal-Mart is a Motley Fool Inside Value pick, and VASCO Data Security is a Motley Fool Stock Advisor selection. Try out any of these services free for 30 days.

Fool contributor Todd Wenning believes there is a positive correlation between the popularity of The Hills on MTV and the dumbing-down of America. He owns shares of Sun Hydraulics but holds no financial position in any other company mentioned. The Fool's disclosure policy keeps Fooldom running smoothly.