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 you 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.

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


$26 million

Clean Harbors


$16 million

Green Mountain Coffee Roasters


$19 million

Deckers Outdoor


$19 million

Almost Family


$9 million

Southwestern Energy


$187 million

FTI Consulting


$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.

To see just how important it is to start small in the market, take a look at the returns that the 10 best large caps offered over the same period of time:


Return, 1999-2008

Jan. 1, 1999, Market Cap

China Mobile (NYSE: CHL)


$20 billion

BHP Billiton (NYSE: BHP)


$16 billion



$19 billion

Royal Bank of Canada


$15 billion

Southern (NYSE: SO)


$20 billion

Bank of Nova Scotia


$11 billion

ConocoPhillips (NYSE: COP)


$11 billion

Rio Tinto (NYSE: RTP)


$16 billion

Nike (NYSE: NKE)


$12 billion

ExxonMobil (NYSE: XOM)


$178 billion

*Data from Capital IQ and is adjusted for dividends.

Even after giving these companies credit for their hefty dividends, their returns still don't stack up.

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 Goldman Sachs and 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:

  1. 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 $26 billion Celgene, we follow Natus Medical, a $375 million maker of health screening products for newborns, in the health-care space.

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

Your next step
So take this lesson from the market's 10 best stocks, and put it to work in your portfolio 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 does not own shares of any company mentioned. Natus is a Hidden Gems recommendation. Quality Systems is a Stock Advisor pick. Southern and Bank of Nova Scotia are Income Investor choices. Hansen Natural is a Rule Breakers selection. This is the Fool's best disclosure policy.