A lot of investors were gloating about their stocks' 2009 performance.
Who are these people, you ask? Shareholders of some of these top-performing stocks:
|
Company |
Rank |
2009 Dividend-Adjusted Return |
Market Capitalization |
|---|---|---|---|
|
Diedrich Coffee |
1 |
9,581% |
$2.0 million |
|
Vanda Pharmaceuticals |
4 |
2,150% |
$13.3 million |
|
ValueVision Media |
9 |
1,355% |
$11.1 million |
|
Pilgrim’s Pride |
11 |
1,313% |
$46.7 million |
|
Compugen |
22 |
1,028% |
$12.2 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 with some of the top stocks of the S&P 500 index over the same time:
|
Company |
Rank |
Year-to-Date Dividend-Adjusted Increase |
|---|---|---|
|
XL Capital |
1 |
395% |
|
Tenet Healthcare |
2 |
369% |
|
Genworth Financial |
5 |
301% |
|
Amazon.com |
18 |
162% |
|
Sun Microsystems |
25 |
145% |
Data from Capital IQ, a division of Standard & Poor's.
While the latter results are nothing to sneeze at, particularly given that the overall market was up just 26.5% 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 investors into the arms of stable, financially pristine large-cap stocks. Which makes now an even better time to buy up shares of 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.
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This article was originally published June 2, 2009. It has been updated.
Adam J. Wiederman doesn't own shares of the companies mentioned above. Amazon.com is a Motley Fool Stock Advisor recommendation. The Motley Fool's disclosure policy is a top performer.
