As an investor, you have a lot of information at your fingertips. In fact, you're probably flooded with data touting the decade's best stock or next year's most influential company.

Whether you're a serious investor or just a beginner, it can be tough to filter out the noise to find the stocks that will truly enhance your financial well-being.

So what should you pay attention to? And what should you ignore?

Stay away from Wall Street
Ignore the analysts. In fact, you can pretty much ignore everyone on Wall Street, for that matter.

Why? They're not very good at serving you.

The Proprietary Research team at Thomson Reuters surveyed analyst recommendations across the S&P 500 index of stocks and came up with some shocking results. Out of the 9,162 recommendations covering these stocks, 93% were bullish. Strange -- I didn't realize the market was so rosy.

At the start of 2008 -- one of the worst years in our market's history -- analysts had a "buy" or "strong buy" rating for nearly 50% of covered equities. Reputable researchers were telling investors to buy Sirius XM Radio (Nasdaq: SIRI) back in 2007, when the company was losing millions of dollars and bleeding free cash flow. Worse yet, they suggested a buy rating on Morgan Stanley (NYSE: MS) right before the biggest financial crisis in the last 70 years.

Today, Sirius XM is much better suited for regular investors -- it has turned profitable, is cash flow-positive, and is adding net subscribers in the wake of a difficult recessionary environment. Morgan Stanley has certainly separated itself from the financial pack as a stable institution, but it's still trading at a pretty pricey 28 times earnings, and it's shown continued vulnerability to real estate losses.

Still, neither of these companies has returned to the share prices they enjoyed when Wall Street suggested them. As The Wall Street Journal so tenderly stated: "Wall Street analysts remain a cheerleading chorus whose published advice is a dubious guide for serious investors."

Why are they so wrong?
Despite those buy and sell ratings, analysts aren't really working for us. They're part of a complicated web of alliances that serve companies and institutions before they serve individuals.

For example, they have relationships with the companies they rate -- and slapping a "sell" rating on one of those companies can often imperil that relationship. In addition, their analysis is primarily serving the company they work for, which has a vested interest in advancing certain stocks for institutional investors.

But here's a little secret: It's a good thing analysts aren't working for you.

The best strategy
The more people following a stock, the less chance you have of finding information that hasn't already been uncovered. And it's the discovery of new information that often changes the price of a stock, as people react to news, to forecasts, or to new data. That's why it's hard to find substantial price discrepancies with huge, popular companies.

Take a look at Verizon and Wal-Mart -- each has more than 20 analysts covering it. It's really tough to find an undervalued stock when so many individuals are scouring through their financials.

In addition, each company is slated to grow by less than 12% over the next five years. If you're looking for solid dividends, a stable company, and ample growth -- then there's absolutely nothing wrong with Verizon or Wal-Mart. But if you're looking for the next big multibagger, well, you're looking in the wrong place.

Small-cap stocks are much more thinly followed by analysts or individual investors, which gives you the ultimate competitive advantage when it comes to unearthing new information. In addition, because they're small, they have room to run, so if you can find a fast-growing company, it may have the chance to be the next home run stock.

But not all small caps are good investments.

What you should look for in a small cap? Membership in a relatively unpopular industry (that way you can ensure not many people are evaluating it), a strong position in its market, a demonstrated ability to increase sales, and a reasonable sale price.

A great place to start
Here's an example of three cheap stocks that have grown their revenues by at least 25% annually over the last three years, have a return on equity north of 12%, and fit all of our "small cap" criteria:


Market Capitalization

Analyst Recommendations


3-Year Revenue CAGR*

HealthSpring (NYSE: HS)

$995 million




Hi Tech Pharmacal (Nasdaq: HITK)

$294 million




Hill International (NYSE: HIL)

$177 million





$914 million




Neutral Tandem (Nasdaq: TNDM)

$447 million




*CAGR = compound annual growth rate.

Not only are these companies that return capital to shareholders, but they're trading on the cheap -- and best of all, they're so small that Wall Street won't bother to touch them. Each company has consistently illustrated top-line growth, so there's every reason to believe they'll keep performing well into the future.

Take HealthSpring for example. This small health-insurance company focuses mostly on older individuals involved with Medicare, and its been doing so for the last decade. While it's difficult to predict what health-care reform will do to medical insurers, I can say from firsthand experience that HealthSpring has excellent customer service and has all the properties to differentiate it from the other thousands of insurance providers.

It's not the most exciting story -- but that's the point. The less exciting the story, the better the opportunity, because fewer investors will have the wherewithal to do any due diligence.

These are the types of stocks that the Motley Fool Hidden Gems team looks at and recommends each month. If you're interested in learning more about which small-cap stocks they think have the best chance at crushing the market, take a free, 30-day trial. Just click here for more information. There's no obligation to subscribe.

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This article was originally published March 19, 2010. It has been updated.

Jordan DiPietro doesn't own any companies mentioned here. Wal-Mart Stores is a Motley Fool Inside Value recommendation. The Fool owns shares of Neutral Tandem. The Fool's disclosure policy is written in small caps.