The Way to Make Nearly $1 Million

Let's get this out of the way from the get-go: There are plenty of ways to make $1 million. But if you're not about to sign on as spokesperson for an energy drink, or are unwilling to put a felony on your record, some ways may not be accessible to you.

But my way 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 and here), I was intrigued.

Thomson studied two principal groups over that time: The 100 best performers capitalized at more than $5 billion, and the 100 best performers capitalized from $1 billion to $5 billion back then. Now, because Thomson's study omits the last very volatile year, I've updated the names and numbers through the end of September:

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 can 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, 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 with $5 billion-plus. This should not be surprising, considering that smaller companies can 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 Capitalized Between $50 Million and $1 Billion

*In millions. Data courtesy of Capital IQ.

And that's how you could have made nearly $1 million -- by stashing $5,000 in each of these top-performing small companies. (You’d have turned $45,000 into $862,550). Similar investments in the best-performing mid and large caps would have yielded "just" $458,200 and $322,400, respectively.

Make your own small fortune
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. 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 Oct. 11, 2007, as "The Way to Make $1.3 Million." It has been updated.

Tim Hanson owns shares of America Movil. Apple, Amazon.com, National Oilwell Varco and Marvel are Motley Fool Stock Advisor picks. Petrobras is an Income Investor recommendation. America Movil and CNOOC are Global Gains selections. Middleby is a Hidden Gems choice. The Fool's disclosure policy cooks ... then chills.