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Published: June 24, 2010
Every portfolio needs a strong foundation
of stable and dependable investments. Solid income producers and
tried and true equities are the hallmark of a prudent retirement
plan.
But is that enough?
Those of us heading into retirement may have to do more with our
portfolios if we expect them to support us in our golden years.
And that's not that easy, especially when you consider that
the S&P 500 lost -9.1% from 2000 to 2009.
But not all stocks had a lackluster performance.
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Notice something about these top
performers? They all started as small caps. That unto itself
should come as no surprise. Historically, small cap stocks
outperform their larger, slower-moving, peers. In fact, the
Russell 2000, the benchmark index for small-cap stocks, returned
+41.6% from 2000 to 2009.
But with small caps' bigger returns come bigger risks. Plenty of
small companies fail to slay the Goliaths of their industry.
Despite the challenges, the decade's top performers overcame the
odds -- and thrived. Why? Each had a unique driver to propel it.
Re-inventors: Green Mountain Coffee Roasters (Nasdaq:
GMCR) started as a small cafe in Vermont in 1981. Over the
years, it grew into a solid specialty gourmet coffee
distributor. But in 2006, the company revolutionized its
business by acquiring Keurig, a manufacturer of single-cup
brewing systems.
People have been drinking coffee since the
thirteenth century. But by delivering a unique delivery system,
Green Mountain changed the industry's paradigm. They saw an
opportunity that the big guys missed.
Netflix (Nasdaq: NFLX) was another David that slew
Goliath by changing the industry paradigm. Blockbuster (NYSE:
BBI) and Hollywood Video were huge companies with locations
all over the country. But the little upstart Netflix started
delivering videos and DVDs by mail -- and now directly to your
TV via the Internet. People loved not driving to the store,
settling for whatever was left on the shelves and not paying
late fees.
Industry Wave Riders: Bally Manufacturing
Company (NYSE: BYI) was founded in 1932, selling small
cast-iron slot machines. The company first started trading on
the New York Stock Exchange in 1975 with the ticker symbol
"BLY." But believe me, you wouldn't have wanted to own it for
all those years.
For decades, the casino gaming machine market was limited. But
in 2000, the market began to explode. Las Vegas went through a
decade-long expansion, while additional states legalized
gambling as well. It seemed like every American Indian nation
established a casino business. As the industry expanded, so did
Bally's customer base.
Industries expand and contract for a myriad of reasons. But when
a specific industry is on the upswing, it can turbo-charge the
small caps within it.
Macroeconomic Money Makers: Global trade and a
falling U.S. dollar set the stage for the ascent of fertilizer
company Terra Nitrogen (NYSE: TNH). As the economies in
China and India grew at breakneck speed, so did the size of
their middle classes. With more disposable income, the demand
for more food -- and specifically meat -- grew. It takes about
4.7 pounds of corn to yield 1.0 pound of edible beef. This
shift, initially driven by increased global trade, increased the
demand for grain.
Commodities are priced in U.S. dollars. If the dollar loses its
relative value to other world currencies, the prices of
commodities tend to compensate by rising. Between 2002 and the
spring of 2008, the U.S. dollar lost -40% of its value, while
commodity and fertilizer prices soared.
Sometimes small macroeconomic shifts can cause big shifts in the
investment landscape. Knowing the effects of those shifts can
help investors harness a small-cap winner.
Action to Take--> It
wouldn't be prudent to devote a retirement portfolio to small
caps. But just a few small gems can go a long way.
I currently have two small caps on my watch list. Deer
Consumer Products (Nasdaq: DEER) is small Chinese kitchen
appliance producer. As the Chinese middle class grows and the
Chinese Yuan appreciates, this could be a strong performer.
KMG Chemicals (Nasdaq: KMGB) is a small Houston-based
chemical company. It specializes in the chemicals used to
produce semi-conductors -- a sector that's rebounding with a
vengeance.
-- Amy Calistri
Editor
Stock of the Month
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