Patient investors got the last laugh. Each of these stocks crushed the 10-year returns of both the S&P and the Nasdaq.
The mustard seed
Smaller companies can be particularly trying to wait for. While the larger companies have legions of analysts following their every move, small companies attract little or no Wall Street coverage, which means that even if the company is growing, the market might be slow to catch on.
For instance, in May 2003, the best stock 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 it ramped up its profitable energy drink lineup.
But the best was yet to come. When Wall Street eventually reali! zed Hansen's growth potential and its strong brand, the stock went up. Today, it's up more than 8,000% in almost five years -- turning $10,000 into $810,000 today. Patient investors who saw the potential in Hansen's growth strategy have been rewarded, to say the least.
How do I get those returns?!
OK, Hansen might be an extreme example. After all, not many stocks jump 8,000% in five 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 of becoming 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 was only up 7%. Despite the weak return! s, Tom still felt strongly about Buffalo Wild Wings' potential! and re- recommended the stock two more times to Hidden Gems subscribers during this period.
Sticking to his guns paid off -- at one point, the original Buffalo Wild Wings pick more than tripled in value, though recent volatility has reduced that gain to 92%. That hasn't diminished the team's confidence in the stock, and it continues to recommend it to subscribers.
The Foolish bottom line
Exceptional companies will eventually be recognized by the market -- and when they are, 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. Since 2003, their picks have averaged 33% returns versus the market's! 11%.
This article was first published on April 10, 2007. It has been updated.
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Source: http://www.fool.com/investin! g/small- cap/2008/02/28/stocks-worth-waiting-for.aspx
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