Get Ready to Buy

"Over the years, small-cap stocks crush their large- and mid-cap peers."

That's how I planned to open today. By now, I'd be making my case -- dropping names like Nagel and Quigley and 70 years' worth of Ibbotson data. And by ... now! My inbox would be full. "Your numbers are skewed by outliers," you'd be shouting, or "What about survivorship bias?" And you'd be right. It's the fatal flaw with all historical data: The future ain't the past.

So forget the numbers
Fortunately, you don't need Excel to prove that tomorrow's mega-cap stars are mostly small fries today. But you do need a few clues to find them before they take off. History suggests we're after a smallish company ...

And one more thing: You want a stock that hasn't hit Wall Street's radar yet. That way, you can benefit from pent-up demand when earnings and revenues pick up and the sell-side analysts catch on.

What do I mean, "zealots"?
Remember the late Dave Thomas, the lovable face of Wendy's (NYSE: WEN)? Or how about Herb Kelleher, the no-nonsense peanut-tossing founder of Southwest Airlines (NYSE: LUV) who just this week stepped down as the company's chairman after 37 years? Even those "don't be evil" guys from Google (Nasdaq: GOOG) will do, though I bet you can't pull their names.

You don't need to check their insider holdings to know these guys had huge stakes in these businesses. And, thankfully, there's one more like them born every day. That's the beauty of the stock market. We don't have to be a genius to hitch our wagons to one.

Which is not to say that finding them is easy, but it can be done. More than anything, we need to be patient and pick our spots. Even better, we can take a cue from the Motley Fool Hidden Gems method and seek out companies with market caps of less than $2 billion that offer:

Just remember those five keys
Back in the '80s, they led designing types like my pal Ricky to Charles Geschke and John Warnock of Adobe Systems (Nasdaq: ADBE) -- a stock that packed on more than 10 times its original value during the '90s. One in a million, you say? Not quite. Much the same happened with Scott Cook's Intuit (Nasdaq: INTU).

Not a techie? No worries. As a stock guy, I caught Joe Ricketts' enthusiasm for what is now TD Ameritrade (Nasdaq: AMTD) back when online brokers were just catching on. Meanwhile, millions were discovering Pierre Omidyar's eBay (Nasdaq: EBAY), though you had to be quick to get in early on that one.

More recently, those same five keys led the Hidden Gems team to a dozen or so small-cap stocks that doubled or more over the past five years. (In the spirit of full disclosure, I'll give you the whole story. As of this morning, the Hidden Gems picks are up an average of 34.1%, roughly three times the 10.7% you could have earned on the S&P 500 instead.)

Is this market killing you?
Honestly, I feel your pain. I've been feeling a bit queasy myself. Could we see more volatility? Sure. Could we suffer the big washout everybody's waiting for? It's possible.

But I'm not buying the rumors that the stocks are dead. I've got some dry powder, and I'm looking to buy on weakness. That's why I always have a wish list of great small companies on hand for times like this. You need one, too.

If you're short on ideas, you should try out Hidden Gems. It's free for a full month, while you decide if it helps you make money. When your trial is up, you don't have to join. Meanwhile, you can read all the issues and recommendations on Day One, including the team's top five picks for new money.

Copyright © 2008 Universal Press Syndicate.