The best stocks? Is that really what I'm going to write about, after a year (2008) in which the S&P 500 dropped by nearly 40%?

It is, actually. You learn pretty rapidly in this business that the best way to make money in the market is to invest for the long term, and recognize that volatility is part of the ride. And when you commit to the long term, you quickly discover that the stocks that offer the best returns today aren't well-known, widely owned names such as Intel and General Electric (NYSE:GE).

But I'm getting ahead of myself. Before I can get to the takeaway, I have to show you the data. This is a simple list of the top-performing stocks of the past 10 years. I compile this list at the end of every year, and every year, it yields the same fascinating insight:


Return, 1999-2008

Jan. 1, 1999, Market Cap

Hansen Natural


$53 million



$252 million

Quality Systems (NASDAQ:QSII)


$26 million

Clean Harbors (NASDAQ:CLHB)


$16 million

Green Mountain Coffee Roasters


$19 million

Deckers Outdoor


$19 million

Almost Family


$9 million

Southwestern Energy


$187 million

FTI Consulting (NYSE:FCN)


$16 million

XTO Energy


$343 million

Data from Capital IQ, a division of Standard & Poor's. Includes only U.S.-listed stocks with verifiable stock price histories on major exchanges.

The trait that sets these stocks apart
What does an energy-drink maker (Hansen) have in common with a biotechnology leader (Celgene)? A home-nursing practitioner (Almost Family) with the makers of Ugg boots (Deckers)? A natural-gas driller (XTO) with some guys who sell java (Green Mountain)?

On the face of it, not much. But if you look closely, you'll see that these were all very small companies when their amazing stock market runs began.

Here's what's special about very small companies
And although companies such as Celgene and XTO are big-cap market darlings today, tracked and owned by big institutions such as Citigroup (NYSE:C), Goldman Sachs (NYSE:GS), TIAA-CREF, and the New York State Common Retirement System, the next Celgene and the next XTO are being ignored and undervalued -- just as Celgene and XTO were 10 years ago! That's because companies like these are too small and too obscure to be worth Wall Street's "valuable" time.

So if you want to buy the best returns, you have to look at stocks today that are:

1.    Ignored.
2.    Obscure.

And, most of all:

3.    Small.

That was the case at the end of 2005, 2006, and 2007 as well.

They're out there
At Motley Fool Hidden Gems, these are precisely the types of companies we spend our time looking for. Rather than tracking $22 billion Celgene, we follow Natus Medical (NASDAQ:BABY), a $320 million maker of health screening products for newborns, in the health-care space. Instead of $22 billion XTO, we've recommended that you get energy exposure by buying $220 million Dawson Geophysical.

Though Natus and Dawson are small, we believe they're well managed, cash-conscious, and poised to take advantage of enormous market opportunities. That last point, after all, is what spurs the best small companies to grow big, and that's what we believe our Hidden Gems recommendations can do for your portfolio.

Your Mid Year's resolution
So take this lesson from the market's 10 best stocks, and put it to work in your portfolio this coming year by buying small caps. If you'd like some help doing just that, you can see all of our Hidden Gems research and recommendations by joining the service free for 30 days.

Click here for more information.

This article was first published Dec.24, 2008. It has been updated.

Tim Hanson owns shares of Dawson Geophysical. Natus and Dawson are Hidden Gems recommendations. Quality Systems is a Motley Fool Stock Advisor pick. Intel is an Inside Value choice. The Motley Fool owns shares of Intel and Dawson as well as covered calls on Intel. This is the Fool's best disclosure policy.