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Wednesday, February 15, 2017
Back in the fall, my team ran a screen for the best-performing stocks from 1996 to 2016.
Our goal was simple: Identify what factors can lead a stock to stupendous financial success, at a level that goes beyond virtually every other investment opportunity in the entire world.
These opportunities are every investor's ultimate goal. But most people have no idea how they work... or that they can be predicted at all.
We now believe they can...
As I studied the 100 best-performing stocks of the last 20 years, I saw three common factors come up over and over again.
Not only that, but if you had invested in one of these stocks – assuming you reinvested your dividends – every single one delivered returns of at least 1,000% over that time frame.
Today, I'm going to tell you what these stocks had in common. And I'll show you that these traits point to a group of stocks that can dramatically increase your returns... without increasing your level of risk.
Some of the companies on our list were in hyper-growth mode, while others were more established.
But despite covering a wide range of industries – including homebuilding, technology, retail, and even a railroad – these companies all had three things in common...
On average, these companies increased their revenues by nearly 35% per year.
The market's best performers averaged margins of more than 37% from 1996 through 2016.
It should come as no surprise that these companies were small-cap stocks in 1996, with an average market cap of less than $700 million... Once a company reaches a certain size, doubling its revenues and stock price every two or three years is no longer possible. Solid small companies are capable of scaling up revenues more quickly, and they tend to outperform over the long haul.
The point is, you don't have to take a lot of risk to make a lot of money in small-cap stocks.
The famous Fama-French studies at the University of Chicago have thoroughly tracked how different segments of the stock market performed. They found that small-cap growth stocks are the best-performing investments you can make... and that investing in an index of these stocks would have brought in nearly 15% annualized total returns from 1927 to 2012.
In fact, just $1 invested in a "small-cap value" index back in 1927 would be worth around $140,000 today. (Meanwhile, $1 invested in the S&P 500 back in 1927 would be worth around $3,500 now.)
So... how do you find the best small caps?
My research team wanted an answer... so we built a hypothetical index. We wanted to see what would happen if you bought every small-cap stock trading at a reasonable valuation, with strong annual revenue growth and not too much debt.
In other words – we wanted to see if our three traits pointed to the best small-cap stocks.
What we found was that if you bought all of these stocks and rebalanced your portfolio every quarter, you would have returned around 3,400% over the last 25 years. As you can see in the following chart, the benchmark Russell 2000 small-cap index returned just 640% in the same time frame...
Of course, it's not practical to buy every single small-cap stock and rebalance your whole portfolio every quarter. This is totally hypothetical.
The point is, if you're looking to shoot fish in a barrel, you want to start in a barrel that's chock-full of fish. That barrel is small-cap value stocks... And tracking them can be a fantastic way to generate huge returns.
There's more to this system than I can cover here today. But it's clear that focusing on small-cap value stocks can dramatically increase your returns... And you don't have to take big risks to do it.
And if you invest in the right small caps, you might even end up with a 1,000%-plus winner...
"With more than $250 billion in value, this company is already a global giant," Steve writes. "But you ain't seen nuthin' yet..." It may not be a small cap, but it's still growing as fast as a startup. Get the full story here: This Little-Known Company Will Soon Be the Largest in the World.
"It's not as hard for a small company to increase its sales by double, triple, or more," Chris Mayer writes. Not all small caps become big companies – but three key characteristics can help you pinpoint the winners. Learn more here: Three Clues to Finding the Next 100-Bagger.
A BRIGHT SPOT IN RETAIL...
Today's chart highlights the dominance of online shopping...
Last year, falling same-store sales hurt many brick-and-mortar retailers in their critical holiday quarter. This trend crushed companies like luxury-goods provider Michael Kors (KORS) and apparel giant VF Corporation (VFC). But online retailers continue to thrive... Last quarter, e-commerce spending rose 18% to nearly $110 billion. And that's boosting shares of Internet retailer eBay (EBAY)...
As one of the world's largest online marketplaces, eBay is a one-stop shop for anyone looking to buy or sell anything from a tennis racket to a pickup truck. With more than 167 million active users on the site and around 1 billion items listed for sale at any given time, it's no wonder business is booming today.
Shares of eBay spiked over the last year. Unlike its competitors in traditional retail, eBay's sales are up for each of the last four quarters. As long as this trend continues, its shares will likely move higher...