Published:
March 24, 2008
How many times have you heard
someone say something along these
lines: "I wish I had bought
Wal-Mart 20 years ago," or
"I'm looking for the next
Microsoft."
It's easy to share that sentiment,
as well as the frustration of not
being able to spot future
bellwethers when they are still in
their early growth stages.
Of course, some farsighted investors
did see the potential of those two
blue-chip companies and bought them
long before they became household
names.
In November 1980, Wal-Mart (NYSE:
WMT) was
trading at a split and
dividend-adjusted price of $0.01 per
share. With a recent price around
$50, the stock has skyrocketed about
5,000 times in value since then,
meaning someone who invested a
modest $1,000 in the up-and-coming
retailer back then would now be a
millionaire several times over.
Meanwhile, an investor who had the
foresight 20 years ago to see that
Microsoft (Nasdaq: MSFT) was about to revolutionize
the software industry could have
picked up the stock at an adjusted
price of $0.12 per share. We all
know the rest of the story -- MSFT
has since soared more than 200 times
in value.
Hit the Restart Button
The vast majority of investors
regret not having bought Wal-Mart or
Microsoft 20 years ago, long before
they became the behemoths they are
today -- but the market seldom gives
us a second chance. Or does it?
Consider this: many investors in
2028 will probably look back at the
opportunities available in today's
market with a similar sense of
regret. Without a doubt, the giants
of tomorrow are out there right now
-- and there is still time to act.
Of course, finding future leaders is
never easy. In all likelihood,
though, the companies that will
deliver the biggest gains over the
next 20 years are probably quite
small today.
That's because stock prices are a
derivative of earnings growth. It
stands to reason that a small
company with $10 million in earnings
can double or triple that figure far
quicker and easier than a corporate
giant with $10 billion in earnings
-- richly rewarding its shareholders
in the process.
Long-term performance numbers bear
this out:
Over the past five years, small-cap
companies have outpaced their
large-cap counterparts. In fact, the
Russell 2000 Index has delivered an
impressive annualized return of
about +14% over that period -- well
ahead of the +11% average annual
return posted by the S&P 500.
Meanwhile, over the same time frame,
value stocks have soundly
outperformed growth stocks.
The small-cap value sector has been
one
of the single best-performing asset
classes, delivering annual gains of
nearly +17% over the past five
years.
Of course, the markets are cyclical,
and anything can happen over short
periods of time. Therefore,
long-term performance figures tend
to have far more predictive power.
On that front, small-cap value
stocks still look superior . . .
|
1927
- 2005 Returns
|
Value |
Growth |
| Large-Cap |
+9.2% |
+6.2% |
| Small-Cap |
+12.1% |
+5.8% |
|
As the table shows, small-cap
value stocks have climbed at a
healthy +12.1% annual clip over the
past eight decades. Yet during the
same time period, based on
well-documented research by
professors Gene Fama and Ken French,
the stock market as a whole has
risen an average of just +6.7%
annually.
Over the long haul, that difference
can add up to a substantial amount
of money.
| Growth
of $10,000 |
10
Years |
20
Years |
30
Years |
40
Years |
| All
Stocks (+6.7%/yr) |
$19,127 |
$36,584 |
$69,973 |
$133,837 |
| Small-Cap
Value (+12.1%/yr) |
$31,337 |
$98,200 |
$307,729 |
$964,327 |
|
If you want to outperform the
broader market over the long haul,
then you need to have exposure to
small-cap value stocks. But which
small-cap securities are poised to
deliver the greatest returns in the
coming years?
Nathan Slaughter, Editor of Half-Priced
Stocks, recently profiled
two standout small-cap companies
that are well on their way to
becoming the blue-chips of tomorrow.
These include a household retail
stock that has jumped +4,000% in
recent years (but still has plenty
of room to run), as well as a small
semiconductor firm that is beginning
to dominate the chip market for DVD
players, printers, camcorders,
mobile phones, and other electronic
products. If you'd like to learn the
names and ticker symbols of these
securities, PLUS receive in-depth
value investing guidance each and
every month, visit
this link to subscribe to Half-Priced
Stocks. |
