The Way to Make $1.3 Million

Let's get this out of the way from the get-go: There are plenty of ways to make $1.3 million. But if you're not about to sign on as spokesperson for an energy drink or are not willing to put a felony on your record, some ways may not be accessible to you.

My way, however, is.

Let back-testing open your eyes
Thomson Financial recently released a research report documenting the shared characteristics of the best-performing companies from September 2001 through August 2007. As someone who's carved out a niche studying the market's best stocks (also see here or here), I was intrigued.

Thomson studied two principal groups over that time: The 100 best performers capitalized at $5 billion-plus and the 100 best performers capitalized from $1 billion to $5 billion back in 2002. Here are the top five names (according to my research) from each group:

Best Companies Capitalized at $5 Billion or More

*In millions. Data courtesy of Capital IQ.

Best Companies Capitalized Between $1 Billion and $5 Billion

*In millions. Data courtesy of Capital IQ.

Thomson concluded that across these two universes of companies, the best performers averaged revenue growth between 13% and 15% and earnings-per-share growth between 29% and 38% alongside consistent returns on equity. Those numbers are well above what lesser investments are able to achieve.

In other words, growth is your friend when it comes to stock market catalysts.

But you can do even better
Thomson made another important observation, and it's one that we beat like a drum at Motley Fool Hidden Gems:

The best-performing companies with a market cap of $1 billion-plus showed on average better growth than those of $5 billion-plus. This should not be surprising considering smaller companies are able to deliver better earnings and revenue growth.

Indeed, over the same time period, the top-performing companies capitalized between $50 million and $1 billion (which also posted high revenue and earnings growth) crushed their larger peers:

Best Companies Between $50 Million and $1 Billion

*In millions. Data courtesy of Capital IQ.

And that's how you could have made your $1.3 million -- by stashing $1,000 in each of the 100 best-performing small companies. Similar investments in the 100 best-performing mid and large caps would have yielded "just" $591,000 and $394,000, respectively, over the time period of the study.

Make your own $1.3 million
Of course, predicting prolonged periods of high growth before they happen is no small feat. At Hidden Gems, however, we look for a number of indicators, among them:

1. Tenured corporate leaders who own or are buying a significant number of shares.
2. Growing operations in a profitable and protected niche.
3. A wide and unrealized market opportunity.
4. Expanding profit margins.

Our Hidden Gems team is committed to helping more investors find the market's best small public companies, and our recommendations are beating the broader market by 25 percentage points on average since we opened shop in 2003.

You can take a look at our favorite picks for new money now by joining the service free for 30 days. Click here to get started making your fortune today.

This article was first published on Oct. 11, 2007. It has been updated.

Tim Hanson does not own shares of any company mentioned. Posco is a Motley Fool Income Investor recommendation. Apple, Amazon.com, Coach, and Garmin are Motley Fool Stock Advisor picks. Garmin is also a Global Gains selection. The Fool's disclosure policy cooks ... then chills.