Making money in the stock market requires us to study the past to identify what strategies will work well in the future. That's why my colleague Tim Hanson has spent years studying the U.S. market's best-performing stocks.
While this environment has been tough for all of us, it's important to remember that even over the past five years, there have been a number of non-micro-cap multibaggers in this country -- 23, to be exact. And studying such success stories is the best way we can learn how to make money in the future.
Of those 23 stocks, these were the top 10 performers:
| Company | Five-Year Return Through 2008 |
|---|---|
| Southwestern Energy (NYSE: SWN) | 870% |
| Apple | 699% |
| Intuitive Surgical | 643% |
| Range Resources | 446% |
| Myriad Genetics | 415% |
| Celgene | 393% |
| Monsanto | 389% |
| Immucor | 340% |
| Alexion Pharmaceuticals | 326% |
| Seaboard | 323% |
Data from Capital IQ. Companies capitalized over $300 million as of Dec. 31, 2003.
That's a fairly select group, and some pretty heady performance for this environment.But it turns out we can do better.
With these stocks
While there were just 23 domestic multibaggers over the past five years, there have been more than 100 foreign ones. In fact, all but three of the top 10 stocks in the world came from abroad.
Here's what that top 10 list looks like when we include foreign stocks:
| Company | Return 2004-2008 | Country |
|---|---|---|
| Grupo Elektra | 877% | Mexico |
| Southwestern Energy | 870% | United States |
| Doosan Heavy Industries | 855% | South Korea |
| NMDC | 826% | India |
| Japan Steel Works | 825% | Japan |
| Apple | 699% | United States |
| Tullow Oil | 669% | United Kingdom |
| Zijin Mining | 664% | China |
| China Overseas Land and Investment | 659% | Hong Kong |
| Intuitive Surgical | 643% | United States |
Data from Capital IQ, a division of Standard and Poor's, and company websites. Includes companies capitalized at more than $300 million on Dec. 31, 2003 with verifiable stock price histories.
The contrast is enormous when, for instance, we compare the five-year performance of Grupo Elektra, the Mexican banking and electronic retail giant, with those of its U.S. counterparts, Bank of America (NYSE: BAC) and Best Buy (NYSE: BBY).
The lesson is clear: If you restrict yourself to the U.S., you are going to miss out on many of the world's best stocks.
How come?
Warren Buffett and many other investors note that our economy is too large and mature to enjoy the same growth rates that we have in the past. But that's not true of smaller, emerging economies. That's one of the reasons why companies like Google (Nasdaq: GOOG) and General Electric (NYSE: GE) enjoy such growing demand in foreign markets, and why, for example, China Mobil (NYSE: CHL) enjoys more rapid sales growth than AT&T (NYSE: T).
And when we compare the United States' GDP growth with those of the economies represented above, we see that fast-growing markets can produce tailwinds for investors:
| Country | Annual Real GDP Growth 2004-2008 | Stock Market Return 2004-2008 |
|---|---|---|
| China | 10.6% | 22% |
| India | 8.3% | 65% |
| South Korea | 4.6% | 37% |
| Mexico | 3.4% | 154% |
| United States | 2.6% | (19%) |
| United Kingdom | 2.4% | (1%) |
| Japan | 1.8% | (18%) |
Data from The World Bank and Yahoo! Finance.
According to The World Bank, emerging markets like these will continue to grow faster than developed economies. And you can bet these sorts of dynamic economies will yield some fantastic investments.
Here's one example
Take MercadoLibre, the "Latin American eBay." While eBay has grown sales at an impressive 23% annual rate over the past three years, MercadoLibre's business is up a whopping 69% annually.
See, while the number of Internet users in the United States has doubled since 2000, South American Internet use has risen more than 600%. Only one quarter of the population currently has access to the Web, so there's still plenty of room for growth.
In addition, the governments of Uruguay and Brazil, MercadoLibre's largest markets, have committed stimulus funding for supplying laptop computers to public schools, while Google and HSBC will provide Wi-Fi to the region. As Internet usage increases and customers do more of their shopping online, MercadoLibre -- now a virtual monopoly -- will profit.
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