Stocks Worth Waiting For

Instant gratification is becoming more and more a part of our culture. Technology has allowed us to obtain information and services whenever we want them. Not sure what the word "indefatigable" means? Google can give you the answer in 0.02 seconds. Heck, you can download an entire music library from the comfort of your own home and play it a few minutes later on your iPod while you're making a quesadilla.

With stocks, however, not much has changed over the years. Large fortunes are still built over years and decades, not minutes and hours.

When we take the time to research a company and make an investment, it would be nice to receive instant confirmation that we made the right decision. Unfortunately, it might take quite a while to receive that confirmation.

Consider:

Data from Capital IQ, a division of Standard & Poor's.

Patient investors got the last laugh. Despite the recent market volatility, each of these stocks crushed the 10-year returns of both the S&P and the Nasdaq -- a decade in which then-blue chips like Dow Chemical (NYSE:DOW) and Eli Lilly (NYSE:LLY) posted losses.

The mustard seed
It can be particularly trying to wait for smaller companies, especially in a topsy-turvy market like the one we've seen over the past year, but the fact remains that while the larger companies have legions of analysts following their every move, small companies attract little or no Wall Street coverage. This means that even if the company is growing, the market might be slow to catch on.

For instance, in May 2003, one of the best stocks of the past 10 years, Hansen Natural, traded at approximately the same price it did in June 1998. During this period, the company ran a good business -- it increased net income by 67% and revenue by 97%, and it posted a double-digit return on equity while ramping up its profitable energy-drink lineup.

But the best was yet to come. When Wall Street eventually realized Hansen Natural's growth potential and its strong brand, the stock soared. Today, it's up about 7,400% in just about seven years -- turning $10,000 into $750,000 today. Patient investors who saw the potential in Hansen Natural's growth strategy have been rewarded, to say the least.

How do I get those returns?!
OK, Hansen Natural might be an extreme example. After all, not many stocks jump 7,400% in seven years -- so I'll give you another example.

In July 2004, Fool co-founder Tom Gardner recommended Buffalo Wild Wings to Motley Fool Hidden Gems subscribers. He saw a rapidly growing $200 million restaurant chain with the potential to become a category-killer in casual dining. Moreover, the company had $47 million in cash, zero debt, and high insider ownership.

Everything pointed to higher returns, but 10 months later, the pick had risen by only 9%. Despite the weak returns, Tom still felt strongly about Buffalo Wild Wings' potential and recommended the stock two more times to Hidden Gems subscribers during this period.

Sticking to his guns paid off: Buffalo Wild Wings has largely bucked this recession, and the original recommendation has since returned 230%.

The Foolish bottom line
The market will eventually recognize exceptional companies -- and when it does, the returns can be huge. Sometimes, all it takes is a little patience.

Want to find some great stocks with tremendous upside potential? The Hidden Gems team specializes in finding unrecognized small companies with solid balance sheets, dominant positioning in their markets, and shareholder-friendly management teams.

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This article was first published April 10, 2007. It has been updated.

Fool analyst Todd Wenning's random '90s movie of the day is Airborne, a story about a rebellious California surfer who moves to Todd's hometown of Cincinnati and joins a roller- blading gang, of all things. Todd doesn't own shares of any company mentioned. Hansen Natural and Google are Rule Breakers recommendations. National Oilwell Varco is a Stock Advisor pick. Buffalo Wild Wings is a Hidden Gems recommendation, and The Motley Fool's disclosure policy is not gonna protest.