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The Way to Make $1.3 Million

By Tim Hanson October 11, 2007 Comments (10)

61 Recommendations

Let's get this out of the way from the get-go: There are plenty of ways to make $1.3 million. But if you're notabout to sign on as spokesperson for an energy drink or are not willing to put a felony on your record, someways may not be accessible to you.

My way, however, is.

Let back-testing open your eyes

Thomson Financial recently released a research report documenting the shared characteristics of the best-performing companies from September 2001 through August 2007. As someone who's carved out a nichestudying the market's best stocks (also see here orhere), I was intrigued.

Thomson studied two principal groups over that time: The 100 best performers capitalized at $5-plus billion andthe 100 best performers capitalized from $1 billion to $5 billion back in 2002. Here are the top five names(according to my research) from each group:

Best Companies Capitalized at $5 Billion or More

Company2002 Market

CapReturn

Apple (Nasdaq:AAPL)

$5,4411,657%

AmericaMovil $10,0331,090%

Posco $5,047 856%

PetroChina $33,589 663%

BHP Billiton $15,651 628%

Data courtesy of Capital IQ.

Best Companies Capitalized Between $1 Billion and $5 Billion

Company 2002 MarketCap

Return

Research In Motion (Nasdaq:RIMM)

$1,2032,992%

ICICI Bank $1,1721,324%

Amazon.com (Nasdaq: AMZN) $2,1661,218%

Coach (NYSE: COH) $1,1611,198%
http://www.fool.com/investing/small-cap/2007/10/11/the-way-to-make-13-million.aspx#commentsBoxAnchor%23commentsBoxAnchorhttp://www.fool.com/investing/small-cap/2007/10/11/the-way-to-make-13-million.aspx#commentsBoxAnchor%23commentsBoxAnchorhttp://www.fool.com/investing/small-cap/2006/12/29/the-markets-10-best-stocks-revisited.aspxhttp://www.fool.com/investing/small-cap/2006/02/15/the-secret-of-superior-stocks.aspxhttp://www.fool.com/investing/small-cap/2006/02/06/325-incredible-returns.aspxhttp://quote.fool.com/summary.aspx?s=AAPLhttp://quote.fool.com/summary.aspx?s=RIMMhttp://quote.fool.com/summary.aspx?s=AMZNhttp://quote.fool.com/summary.aspx?s=COHhttp://www.fool.com/investing/small-cap/2007/10/11/the-way-to-make-13-million.aspx#commentsBoxAnchor%23commentsBoxAnchorhttp://www.fool.com/investing/small-cap/2006/12/29/the-markets-10-best-stocks-revisited.aspxhttp://www.fool.com/investing/small-cap/2006/02/15/the-secret-of-superior-stocks.aspxhttp://www.fool.com/investing/small-cap/2006/02/06/325-incredible-returns.aspxhttp://quote.fool.com/summary.aspx?s=AAPLhttp://quote.fool.com/summary.aspx?s=RIMMhttp://quote.fool.com/summary.aspx?s=AMZNhttp://quote.fool.com/summary.aspx?s=COH


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Garmin (Nasdaq: GRMN) $1,7441,173%


Thomson concluded that across these two universes of companies, the best performers averaged revenue growthbetween 13% and 15% and earnings-per-share growth between 29% and 38% alongside consistent returns onequity. Those numbers are well above what lesser investments are able to achieve.

In other words, growth is your friend when it comes to stock market catalysts.

But you can do even better

Thomson made another important observation, and it's one that webeat like adrum atMotley Fool HiddenGems:

The best-performing companies with a market cap of $1+ billion showed on average better growth than those of$5+ billion. This should not be surprising considering smaller companies are able to deliver better earnings andrevenue growth.

Indeed, over the same time period, the top-performing companies capitalized between $50 million and $1billion (which also posted high revenue and earnings growth) crushed their larger peers:

Best Companies Between $50 Million and $1 Billion

Company2002 Market

CapReturn

MEMC Electronic Materials (NYSE:WFR)

$735,631%

Arcelor Mittal $1744,618%

Titanium Metals (NYSE: TIE) $1023,739%

Bancolombia $1592,849%

Gerdau $5462,712%


And that's how you could have made your $1.3 million -- by stashing $1,000 in each of the 100 best-performing

small companies. Similar investments in the 100 best-performing mid and large caps would have yielded "just"$591,000 and $394,000, respectively.

Make your own $1.3 million

Of course, predicting prolonged periods of high growth before they happen is no small feat. AtHidden Gems,however, we look for a number of indicators, among them:

1. Tenured corporate leaders who own or are buying a significant number of shares.2. Growing operations in a profitable and protected niche.3. A wide and unrealized market opportunity.4. Expanding profit margins.
http://quote.fool.com/summary.aspx?s=GRMNhttp://www.fool.com/investing/small-cap/2007/09/27/why-arent-you-earning-50-annual-returns.aspxhttp://www.fool.com/investing/small-cap/2007/10/08/wall-streets-worst-kept-secret.aspxhttp://www.fool.com/investing/small-cap/2007/10/08/wall-streets-worst-kept-secret.aspxhttp://quote.fool.com/summary.aspx?s=WFRhttp://quote.fool.com/summary.aspx?s=TIEhttp://quote.fool.com/summary.aspx?s=GRMNhttp://www.fool.com/investing/small-cap/2007/09/27/why-arent-you-earning-50-annual-returns.aspxhttp://www.fool.com/investing/small-cap/2007/10/08/wall-streets-worst-kept-secret.aspxhttp://quote.fool.com/summary.aspx?s=WFRhttp://quote.fool.com/summary.aspx?s=TIE


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