Judging from all the attention that big, well-known stocks
get, you might think that they make the best investments. But
to find
the best stock prospectsthat will make you truly wealthy,
you've got to look beyond the limelight.
Large-cap stocks certainly have their place in most
investors' portfolios. Although they certainly aren't without
risk, they do tend to be among the
more stable stock investmentsyou can make. You're
unlikely to see explosive growth from widely held stocks, but
since most of them are mature companies with stable business
models, they also have relatively little risk of cataclysmic
failure.
Owning a good portfolio of large-cap stocks should earn
you returns in line with major market averages. If you're
particularly good at picking stocks, you can hope to
outperform those benchmarks by a percentage point or two. But
if merely market-matching returns aren't enough to satisfy
you,
go beyond the headlinesand seek out stocks like the ones
you'll see below.
Think small for big profits
Stocks that are already proven money-makers give
investors a lot of comfort. But you'll find even greater
potential in the stocks of smaller, as-yet-unproven
companies.
Historically, small-cap stocks have given investors
higher returnsthan their large-cap brethren over the long
haul. Why? Here are the top two reasons:
1. Their future is still ahead of them.
For the most part, large companies have already made
their big splash in the marketplace. Sure, some innovative
corporations can stay at the forefront of their industries
even after they grow to behemoth size. But eventually, their
sheer size prevents them from sustaining the same growth pace
they enjoyed in their early days.
In contrast, small-cap stocks have plenty of room to grow.
The companies have shown the success necessary to overcome
their initial obstacles and have successfully attracted
investors in public offerings of their shares. However, they
have yet to
realize their full potential.
2. Nobody's watching them.
With big companies, Wall Street analysts and
institutional investors watch over their operations like
hawks. With so many professionals looking over companies'
shoulders -- often with prime access to the kind of
information individual investors like you can only dream
about -- it's tough for you to gain an edge. Just look at how
many analysts track some of these top companies:
Stock
No. of Analysts
Google (Nasdaq: GOOG)
37
Home Depot (NYSE: HD)
31
Chesapeake Energy (NYSE: CHK)
32
Amazon.com (Nasdaq: AMZN)
31
Boeing (NYSE: BA)
26
Source: Yahoo! Finance. Reflects
number of analysts giving estimates for fiscal 2010
earnings.
In contrast, many small companies escape Wall Street's
attention entirely. Even a strong performer such as
Middleby (Nasdaq: MIDD) attracts fewer than
10 analysts, despite having risen nearly sixfold since 2003.
Stocks that haven't yet put up impressive results to turn
Wall Street's head often have fewer followers, if anyone.
So which stocks are best?
To help you figure out which small-caps are worthy of
yournotice, you'll need to do some digging. Here are
a few rules of thumb about small-caps to get you started:
higher the potential return-- and the greater your
risk.
Strong inside ownership can give you confidence that
company managers aren't just trying to cash in cheap.
As with stocks of any size, you don't want to overpay.
Seek out attractive valuations when they're available.
Just considering those factors, I ran a quick search on
our
Motley Fool CAPSscreener, and came up with six small
stocks with high inside ownership that currently trade at
reasonable valuations:
Stock
% Stock Owned by Insiders
Current P/E Ratio
K-Tron International
12%
12.4 Continued... |