Many investors are gloating about their investment performance over the past year.
Who are these people, you ask? Shareholders of these 10 top-performing stocks:
|
Company |
Dividend-Adjusted Increase
|
Market Capitalization
|
|---|---|---|
|
Vanda Pharmaceuticals |
1,120% |
$29.9 million |
|
Diedrich Coffee |
1,107% |
$9.7 million |
|
OncoGenex Pharmaceuticals |
591% |
$12.0 million |
|
Kirland's |
493% |
$46.9 million |
|
Comstock Homebuilding |
477% |
$2.3 million |
|
VocalTec Communications |
397% |
$2.6 million |
|
Spectrum Pharmaceuticals |
397% |
$53.9 million |
|
Dollar Thrifty Automotive |
327% |
$100.4 million |
|
Alpha Pro Tech |
313% |
$29.7 million |
|
STEC |
300% |
$507.3 million |
Data from Capital IQ, a division of Standard & Poor's.
Notice anything about those companies? They're small. Very small. Now compare their performance to the top 10 stocks of the S&P 500 Index over the same time period:
|
Company |
Dividend-Adjusted Increase
|
|---|---|
|
Micron Technology |
74% |
|
Ford |
70% |
|
AutoNation |
67% |
|
Whole Foods Market |
59% |
|
Schering-Plough |
47% |
|
O'Reilly Automotive |
32% |
|
Expedia |
31% |
|
First Horizon National |
30% |
|
Western Digital |
26% |
|
Pepsi Bottling Group |
25% |
Data from Capital IQ, a division of Standard & Poor's.
While the latter is nothing to sneeze at, particularly given that the overall market lost more than 20% over that period, wouldn't you rather have the former?
Where you'll find the double-baggers
Small caps' tendency to outperform their large-cap brethren isn't just a down-market happenstance -- it held true in 2005, 2006, 2007, and 2008 as well.
In any market, the stocks with the most potential for outsized returns (stocks that will double, triple, or even increase your investment tenfold) are not found among large caps, but rather among stocks that are:
- Ignored.
- Obscure.
- Very small.
Why? Because the market's greatest inefficiencies (and, thereby, greatest opportunities) lie hidden among the investments that Wall Street analysts and institutional investors shun only because of their size.
Starting today
Investing in small-cap stocks makes many people nervous -- and today's market volatility is sending many people into the arms of stable, financially pristine large-cap stocks. Which makes now an even better time to buy up those oversold small caps.
But not all small caps are equal. You want to make sure you buy small caps that have a rock-solid balance sheet and a solid business model. Both these factors ensure that the company will be around five to 10 years from now, giving it plenty of time to double, triple, or increase tenfold in size.
At Motley Fool Hidden Gems, these are precisely the kinds of stocks we're recommending right now -- and we're putting real money behind our best ideas. What's more, our recommendations are beating the market by an average of 18 percentage points since the service began in 2003.
If you'd like to see all the stocks that have made it into our portfolio, you can find out completely free. Click here for more information.
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This article was originally published June 2, 2009. It has been updated.
Adam J. Wiederman owns no shares of the companies mentioned above. Whole Foods is a Stock Advisor recommendation. The Motley Fool's disclosure policy is a top performer.
