The Best Stocks for the Next 4 Years

We can't be sure just yet, though investors in Amazon.com (Nasdaq: AMZN), Harvest Energy Trust (NYSE: HTE), EntreMed (Nasdaq: ENMD), and NutriSystem (Nasdaq: NTRI) are likely convinced. Each of those stocks is up more than 25% ... over the past month alone.

But some analysts, including PIMCO's Mohamed El-Erian, believe that
the rally is over, and that "valuations are ahead of fundamentals."

It's safe to say that negativity still abounds
The
late Sir John Templeton called scenarios like the one we've been
experiencing "points of maximum pessimism." He also taught that times
of maximum pessimism are the best time to buy -- and he practiced what
he preached.

When the Second World War began, and stocks started to fall, he
borrowed $10,000 and invested it in 104 companies whose shares were
trading for less than $1 -- including 34 that were in bankruptcy. Four
years later, he sold his positions for $40,000, booking a 300% gain on
stocks the market thought were doomed.

With his example in mind, I believe the pessimism still lurking around continues to signal a buying opportunity.

Stocks to profit from pessimism
We should be
buying stocks that, like Templeton's initial bet on pessimism, could
become double- or triple-baggers in the four or so years coming out of
this bear market.

We know the top stocks since the last recession began were mostly small caps -- albeit with a few mid-cap rock stars like Apple
mixed in. Among other things, small companies can more quickly and
efficiently cut costs and streamline operations than their larger
peers, which maintain employees and resources scattered throughout the
country and the world.

But which companies have outperformed since the end of that
bear market? I ran a screen to see what kinds of companies were
double-, triple-, or even-better baggers as the recession receded. And
sure enough, the best-performing companies over the following four
years were all small caps:

Data from Capital IQ, a division of Standard & Poor's.

This list merely shows the top 10, but it's also true that small caps as a whole outperformed their larger brethren coming out of the last bear market -- and this phenomenon wasn't unique to that situation. According to T. Rowe Price
research, small-cap stocks led the market out of the past 10
recessions, posting an average 28% gain, versus the 19% gain for large
caps in the year following the market's recovery.

Given this data, I also ran a screen to see which small caps were
dirt cheap right now -- and possibly poised to outperform as the market
recovers. I looked for companies down more than 50% over the past year,
and trading with price-to-earnings ratios below both that of the
S&P 500 and their five-year average -- qualities I believe could
make for Templeton-sized gains over the next four years.

Here are three companies from that screen. Though they are not
formal recommendations, they are a good place to begin some further
research.

Data from Morningstar and Capital IQ, a division of Standard & Poor's.

All in the family
So if, like me, you're
looking for the best stocks to carry your portfolio out of this bear
market and into wealthy pastures in four years' time, you need to look
for small, underfollowed companies like those above -- and like those
we search for as additions to our Motley Fool Hidden Gems portfolio.

© 2009 UCLICK L.L.C.