The Best Stocks for the Next 4 Years

It sure is starting looks like this bear market is over, isn't it?

We can't be sure just yet, though investors in Crocs (Nasdaq: CROX), American International Group (NYSE: AIG), Fannie Mae (NYSE: FNM) and Conseco (NYSE: CNO) were likely convinced -- each of those stocks is up more than 50% ... over the past month alone!

Some analysts, like 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 we've been in "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:

Company	4-Year Return from Oct. 9, 2002	Oct. 9, 2002 Market Capitalization (in millions)
AmericaTower	5,137%	$139
YFP	2,857%	$434
Research In Motion	2,422%	$705
Bancolombia	2,067%	$203
WESCO International	2,054%	$142
Corning	1,890%	$1,173
Crown Castle International	1,830%	$373
AES	1,767%	$597
Coldwater Creek	1,670%	$131
McDermott International	1,616%	$232

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. Not all are formal recommendations, but they're a good place to begin some further research.

Company	Market Capitalization	P/E Ratio
General Maritime (NYSE: GMR)	$406 million	9.5
Huron Consulting Group (Nasdaq: HURN)	$419 million	9.4
Dynamic Materials (Nasdaq: BOOM)	$218 million	11.2

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