money, finance, business, stock, funds, wealth, analysis
SOURCE: FOOL.com
The Next Home Run Stock
Many of the decade's greatest investments rose to prominence from relative obscurity. Tom Gardner has made it his mission to uncover the greatest stocks for the next 10 years. To this end, he's mining the market's great, unloved small-cap companies.
By Tom Gardner
September 15, 2004
This article was first published on Sept. 24, 2003. It has been updated.
I assume that you, like everyone and his Aunt Avis, would love to find the next Microsoft (Nasdaq: MSFT) -- to dig out the market's best Hidden Gems. Back in January 1990, Microsoft traded at a split-adjusted $0.62 per share. Today, the stock is up around $28. That's an increase of 45 times for long-term investors. Put another way, $5,000 invested in Microsoft in 1990 is worth $225,000 today.
Of course, you'd love to buy the next Microsoft.
But you wouldn't want to take on extraordinary risk, right?
I think you're smart to think that way. And so does a long list of great money managers -- from Peter Lynch to Seth Klarman, Jean-Marie Eveillard to Charles Royce. They all search for small companies with a mixture of sales and free cash flow growth, superior returns on invested capital, heavy insider ownership, and healthy assets -- all at a reasonable price.
Born to be the best
But remember, companies like Microsoft typically display excellent financials from the day they hit the markets. Microsoft was never a penny stock (again, that 62 cents in January 1990 is split-adjusted). It didn't hype itself in press releases, nor did management make outlandish promises to investors.
Companies like Microsoft are run conservatively by executives who themselves own large positions. They're run to sustain profit growth indefinitely. That's in contrast to the whisper-stock party tips that destroy wealth over time.
Contrary to popular perception, to invest in the best small caps, you need not assume great risk.
And finding these hidden gems doesn't...
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