Stocks, as I have said too many times to count, are meant to be long-term investments. So one challenge for investors is to figure out which companies will perform best over, say, the next 10 years. But how?
A good way to start is to look at past performance, so I asked the number crunchers at Morningstar to calculate which stocks had gained the most over the past 10 years. I limited the search to stocks that trade on U.S. exchanges and have a market capitalization of at least $1 billion.
Of the top 25, five are energy companies, four are health care stocks, three are in the chemical sector and two in metals, and the rest are scattered among such disparate sectors as software, soft drinks and shipping.
| Company | 10-year annualized return | Company | 10-year annualized return |
|---|---|---|---|
214% | 44% | ||
112% | 42% | ||
105% | 42% | ||
62% | 41% | ||
52% | 40% | ||
51% | 37% | ||
48% | 36% | ||
47% | 35% | ||
45% | 34% | ||
45% | 34% | ||
44% | 33% | ||
44% | 33% | ||
44% |
Any pattern here?
The list is a bit heavy on commodity producers. That stands to reason, given that the price of crude oil roughly quadrupled during the period.But two characteristics are even more salient: First, all but four of the companies were tiny 10 years ago. Second, the list contains a surprising number of foreign companies. The screens I set to eliminate small-company distortions and non-U.S. companies in general simply could not suppress these powerful trends.
Take size. Deckers Outdoor (DECK, news, msgs), which makes sandals, hiking shoes and boots under such labels as Teva and Ugg, today has a market capitalization of $1.2 billion. But 10 years ago, its market cap was minuscule. Since then, the stock has risen from about $3 a share to $93 (all return and price data are through Nov. 30), an annualized return of 42%.
Another example: Green Mountain Coffee Roasters (GMCR, news, msgs), the maker of such coffee brands as Tully's and Newman's Own. Over the past 10 years, the stock of the Vermont company grew at an annual rate of 51%. Its market value grew 60-fold, to $2.7 billion.
The reason you don't see -- and probably never will see -- a General Electric (GE, news, msgs) or a Pfizer (PFE, news, msgs) on a list of top 10-year performers is that a company with, say, a market cap of $200 billion cannot possibly grow 50-fold in 10 years, to $10 trillion in market value. Not in a $14 trillion economy; the law of large numbers kicks in.
Only one of the past decade's top 100 performers has a market cap today in excess of $100 billion: That's Apple (AAPL, news, msgs), which ranks 100th. If you want to make big money in the stock market, you'll improve your odds immensely if you invest in tiny companies.
Going global
The international angle is more surprising. Of the 25 best performers over the past decade, five, including the top three, trade here as American depositary receipts. Two other foreign highfliers trade in the U.S. without the benefit of ADRs: Frontline (FRO, news, msgs), a Bermuda shipping company with Scandinavian roots, and Inmet Mining (IEMMF, news, msgs), headquartered in Toronto.Two more companies do most of their work abroad but are managed from the U.S.: Cognizant Technology Solutions (CTSH, news, msgs), an information-technology outsourcing company with a heavy presence in India, and Central European Distribution (CEDC, news, msgs), which distributes alcoholic beverages in Russia, Poland and Hungary. Central European trades at a modest 10 times estimated 2010 profits, even though analysts expect earnings per share to grow at an annualized rate of 19% over the next three to five years.
Note that all three of the top stocks on the list compiled by Morningstar are not simply foreign; more specifically, they're Brazilian. No. 1 is Banco Bradesco (BBD, news, msgs), which research firm Hoover's calls "a giant bank for the little guy." One of the largest private banks in Brazil, Bradesco serves low- and moderate-income families and provides insurance and pension services. The stock roughly tripled each year over the past 10. If you had put $100 into Banco Bradesco in late 1999, your investment would be worth $6 million today.
In second and third places are Tele Norte Leste Participacoes (TNE, news, msgs), a telecommunications company, and Braskem SA (BAK, news, msgs), a maker of specialty chemicals, mainly for the domestic Brazilian market. These two stocks merely doubled every year, on average. That's nothing to scoff at, however: Doubling 10 times in a row means growing by a factor of more than 1,000, creating what Peter Lynch, the famed former manager of Fidelity Magellan, would call a "1,000-bagger." For comparison, Apple appreciated an annualized 23%, making it only an eight-bagger.
In all, 18 foreign stocks were among the decade's 100 best performers, including companies from China, Russia, Chile, Mexico and the United Kingdom. Still, Latin America was the standout region for both individual stocks and mutual funds. According to Morningstar, Latin American funds, with an average annualized return of 17%, were the second-best performing group over the past 10 years. Only precious-metals funds, with an average return of 18% per year, did better.
