Biggest Gains Come From Small-Cap Stocks

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With 2009 officially in the rear view mirror, now is an opportune time to look back at the best performing stocks of last year. In 2009, the Russell 2000 small-cap index rose 24% to finish the year at 625.39. That level was just a hair shy of the 636.46 high as the index gained momentum to close out the year, and a vast improvement from the dark days of March when the Russell fell to 343.

The Russell's performance shows that small cap stock returns were impressive in 2009, especially as compared to the Standard and Poor 500 index which rose 19.7%. But it is the top performing stocks of 2009 that really showcases the potential for the small-cap investor, and argues for trying to discover unknown small-cap stocks that will deliver superior performance, rather than simply buying an index fund like the iShares Russell 2000 Index (NYSE: IWM).

This morning I pulled a quick list of the top gainers over the last 52-weeks, and the results should be enough to convince even the staunchest skeptic that small-cap stocks should be a part of every investor's portfolio. Just take a look at the data in the table below.

What sets the top 10 performing stock of 2009 apart is that they are all small cap stocks. What's more, if I extend the list to cover the top 20 performing stocks of 2009 you'd see that there is only one large-cap, Teck Resources (NYSE: TCK) on that list. But Tech Resources only became a $20 billion market cap company after its stock rallied 510%, before which it was a small-cap company.

In fact, among the top 60 performing stocks of 2009, only 8 currently have market caps above $1 billion. And when I go back to each of these company's share values at the beginning of the year, I found that they all began 2009 as small caps with low market capitalizations.

The message is clear: small-cap stocks ruled the market in 2009. That doesn't surprise me, since the biggest winners are almost always small-cap stocks. Because their market capitalizations and share prices are low, rapid growth and increased institutional investor ownership can send shares soaring. Historically these small companies have outperformed following a recession, and 2009 was no different.  As I wrote in my book, The Small Cap Investor: Secrets to Winning Big with Small-Cap Stocks: "After the Crash of 2008, small caps will lead the way."

The common thread among these companies is not that they are all technology innovators, or mining companies, or even emerging market standouts. They are simply small companies that are beating the market by leaps and bounds, often a result of superior revenue and earnings growth.

What's more, they were largely ignored by Wall Street because of their obscurity – and in fact many still are. But once Wall Street takes notice, analyst coverage picks up and big institutions start tracking them and adding the stocks to their own portfolios. And when this happens, demand for shares far exceeds supply, and the result can be a soaring share price.

The message for individual investors is that to earn the biggest returns, you need to buy shares of the small, under-appreciated companies that are simply not yet worth Wall Street's time.

Loyal readers of SmallCapInvestor Daily know that locating these companies is not always easy. But for the investor who likes a little help finding the next stock to double, I offer my SmallCapInvestor PRO advisory. Subscribers to SmallCapInvestor PRO have enjoyed big gains in 2009 like 141% on Gulfport Energy (Nasdaq: GPOR), and 66% on Genco Shipping (NYSE: GNK) over just three months. And current gains on top performers like China Green Agriculture (NYSE: CGA) with 110% and China Natural Gas (Nasdaq: CHNG) with 82%, just since May 2009.

***Last Chance - New Year's Sale Extended:  Last week I offered a special holiday sale to SmallCapInvestor Daily readers. This morning I've heard from a number of readers who wanted to take advantage of the offer, but missed their chance because they were traveling and spending time with their families and friends. I was doing the same over the holidays so I understand how it's hard to find extra time when there is so much going on. For that reason, I checked with our marketing department and was able to convince them to extend the special offer through early this evening.

If you haven't yet taken advantage of this special discount, I encourage you to act now. You can get 50% off a subscription to SmallCapInvestor PRO through midnight tonight.  This 50% discount will be the last opportunity to get my top-performing SmallCapInvestor PRO service at a steep discount from the normal subscription rate.

When you accept this 50% discount to SmallCapInvestor PRO, you'll immediately receive my Special Report: The 10 Most Profitable Small Caps for 2010 (just click here now to start profiting today!).  In this report you'll discover:

A healthcare IT company whose shares are breaking out right now!  The company's technology transcribes a doctor's voice into electronic medical records and it just signed a 5-year deal with a major hospital company. It currently earns $0.72 a share, has zero debt--let me repeat that ZERO debt--and will grow earnings by at least 30% next year.I think company's stock can rise 35% and still be a great bargain.

Another rising star in my portfolio is a company that sells workforce management and scheduling software. Its products are in such demand it stayed profitable, even during the financial meltdown. And now, profits are rising at breakneck speed, and so is the stock after management just raised Q4 revenue and earnings guidance. At this rate, 44% gains in the next few months should be easy...

The $3 stock of a company that makes one of the most advanced wireless credit card processing machines on the market. This one could double as it returns to profitability after a tough 2009, and investors reward much improved financial results in Q1.

There's never been a better time to join SmallCapInvestor PRO. And with a 50% discount available through 12:00 ET midnight tonight, I'm practically giving away memberships.  Click here to get started today and begin profiting from small cap investments early in 2010.