The Year's Top Stock

When 2008 wraps up, which (non-penny) stock will be standing atop the mountain as the equity that offered the year's best returns?

Since it's only September, a lot will change, but if the market had frozen at yesterday's close, these would be the contenders:

Data provided by Capital IQ, a division of Standard & Poor's.

Of course, the market won't stop moving ... and these stocks could get rocked if market volatility continues to rear its ugly head.

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.

What investors in their right mind wouldn't want to make five to 12 times their money and get to brag to everyone that they 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:

Data from Capital IQ, a division of Standard & Poor's. Excludes stocks with market capitalizations less than $100 million or trading for under $5 per share at start of year.

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 past 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 or 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 make up the above list.

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.

This article was originally published Aug. 27, 2007. It has been updated.

Tim Hanson does not own shares of any company mentioned. NASDAQ is a Motley Fool Inside Value recommendation. The Fool's disclosure policy is actually a 25-year-old Hawaiian organ donor.