It's time once again to play the role of lab rat and win some cheese: Which investment yielded the biggest gain over the past five years?
- Leading computer maker Dell
Sirius XM Radio
- Or heavy-machinery maker Caterpillar
If you answered Dell or Sirius XM, you get a mild electric shock and a trip back to the cage. If you sensed a trick question or happened to be the astute investor who picked Caterpillar, a nice chunk of cheddar awaits.
Blowout returns for the boring
Even in a down economy, selling construction and mining equipment has been good for Caterpillar and its investors. The stock has gained an impressive 104% -- or 15.3% compound annual growth -- over the past five years.
Dell's leading position as computer and home office product seller hasn't delivered enough growth to keep the stock rising. The result there is a 40% loss.
And while stock in pre-merger Sirius XM was hot for a while, the newly merged entity has been a net loser in the past five years, with a 21% drop in shares, significantly lagging the broader market.
Examining five-year returns is purely backward-looking, of course, but the point is that the most popular stocks aren't necessarily the best investments. Often, investors equate popularity and glamour with great returns, but expensive prices on popular stocks mean this mind-set can backfire.
Sniffing out the good cheese
The notion that investors have a better chance of finding killer stocks where few people go looking is not new. I hear it preached a lot from longtime Fool analyst Bill Mann and his team at the Motley Fool Hidden Gems small-cap service. The Hidden Gems team has singled out several big winners operating in mundane yet profitable niches such as phosphate production, oven manufacturing, and chicken farming.
And if you're still not convinced that there's big money in the boring, here are three more examples to get you going.
1. Iconix Brand Group
In the past five years, Iconix has returned an amazing 610% -- a compound annual growth rate of 48% -- even though the tough retail environment has knocked shares more than 30% lower so far in 2008. The company also recently inked a license with Wal-Mart Stores
2. Alderwoods Group is a historic example of how investors could profit from the morose. Not many investors would look into one of the leading funeral-service providers for big gains, but before being acquired by Service Corp., Alderwoods was a textbook turnaround story. Once it came out of bankruptcy in 2002, an experienced management team methodically paid down debt and increased revenue and profits.
Investors who bought the one-time Hidden Gems pick in October 2003 and took the $20-per-share cash offer earned a return of more than 191%, much more than most would expect from a boring industry such as death care.
3. Smith Micro Software
Rapid revenue and earnings growth, fueled by successful product launches, has provided big gains for investors. Even with shares falling more than 50% in the past year, the little-known software company has more than doubled investors' money over the past five years. Revenue concentration on a few products and customers makes the stock volatile, however. For instance, Verizon
Get in the know
Little-known, well-run companies such as Health Care Services Group and other small-cap companies have been hammered lately. But picking up a fundamentally sound -- and small -- gem on the cheap can do wonders for your portfolio. Go hunting for them in the market's more mundane sectors, and you can get boring to work for you.
If you'd like a little help getting started, click here to join Hidden Gems free for 30 days, and check out which small-cap stocks the team recommends for big profits from new money today.
This article was originally published on June 27, 2006. It has been updated.
Fool contributor Dave Mock runs the rat race every day, but he rarely gets the cheese. He owns no shares of companies mentioned here. Wal-Mart Stores and Dell are Inside Value recommendations. The Motley Fool has a disclosure policy.