How Dozens of Unknown Small-Caps Crushed Apple in the Heyday of Its Growth
If you bought shares of Apple at the turn of the millennium, then held on for dear life through all its monstrous gains and the occasional sudden crash, you're feeling rich today. That's a 1,930% return, or more than 20 times your original investment. If you had $49,300 to invest in Apple back then, you're an Apple millionaire today. The chart makes the S&P 500 look as flat as a Kansas horizon.
Yes sir, Apple has created plenty of millionaires over the last decade and a half.
But did you know that you could have done better? I mean a whole lot better, as in making Apple look frozen by comparison?
For example, what if you had had the impeccable fashion sense to recognize the long-term value in Deckers Outdoor in that brisk winter air? Here's what you'd get for investing in this even steeper growth story:
With returns like these, you'd only have needed to invest $21,400 to be a Deckers millionaire by now.
Oh, but it gets even better.
A rare handful of stocks actually made Deckers look slow. The absolute king of the hill is Keurig Green Mountain , formerly known as Green Mountain Coffee Roasters. A mere $3,150 invested in early 2000 and left untouched would have grown to $1 million by now:
And of course, the instant-coffee revolution shot through the roof. The stock even bounced back from a near-fatal plunge in 2011, when the Keurig K-Cup pantents were on the verge of expiring and the whole single-serve craze suddenly seemed as hip as pet rocks and 8-track tapes.
These are not the only stocks to have beaten Apple in the new millennium -- not by a long shot, in fact. A Capital IQ screen found no fewer than 95 stocks that outperformed Apple during this wealth-building period.
But Apple holds the largest market cap in the known world! How is it even possible that nearly 100 stocks outperformed this market champion over 14 years?
The answer is actually quite simple. Even though Apple stood at death's door in 1999-2000 and needed help from a longtime enemy to survive another year, the company still came with an $18 billion market cap. Only five of those 95 Apple-beaters even broke the $1 billion mark, and none passed the $2.5 billion level.
Excluding Apple, the average market cap among these rocket stocks was just $212 million. The median market-cap size was even smaller at $56 million. Both Green Mountain and Deckers Outdoor fell below the $30 million mark.
And if you plot the real wealth-creation in terms of market cap value rather than share price percentages, you'll get a dramatically different picture -- and Apple is clearly the king of building massive market caps:
That's the truly impressive part of Apple's recent growth. Anybody can double, triple, or quintuple a penny stock with a market cap counted in the tens of millions. Pulling the same trick with an $18 billion starting price? That's not so easy.
On the flip side, the minnows in the pond can often grow much faster than even the hungriest shark. Warren Buffett might need to look for big, established businesses that could move the needle for his investing empire, but we individual investors can do better by focusing on smaller stocks -- lesser-known names, spring-loaded growth opportunities where the growth-limiting law of large numbers doesn't apply.
Of course, this end of the market pool is also fraught with risks, and the massive growth stories are balanced out by countless failed or struggling micro-caps.
Yeah, but howcan Ido that?
For example, how could a Foolish investor have figured out where Deckers Outdoor and Green Mountain were going, using the information that was available in early 2000?
At the turn of the century, Deckers was not an attractive stock. The maker of fashionable footwear had launched an IPO in 1993, far above its true value. Share prices fell a terrifying 88% by the end of the twentieth century. It became a true penny stock, trading for $0.87 per share.
And yet things were starting to look up for Deckers.
Sales were growing, and free cash flow was turning positive again after dipping into negative territory for a couple of years. These are early signs of a successful turnaround. We're not talking about bulletproof, back-up-the-truck signs, but a good start that warrants a deeper look -- and maybe a tentative investment in the "experimental" portion of your portfolio.
Granted, there's no way to predict a game-changing moment like Oprah Winfrey featuring Ugg boots in her "Favorite Things" TV feature, which was the real breakthrough for Deckers. But luck favors the prepared. As alpine skiing legend Ingemar Stenmark once said: "I know nothing about luck. But the more I practice, the luckier I get." And Deckers Outdoor was already doing almost everything right.
I'm sure that the meticulous Oprah and her research staff would have backed away from featuring a Deckers product if she wasn't convinced that the company could handle the spotlight. And Deckers had already seeded the Hollywood elite with Ugg boots by then, making sure the boots had the cool factor it takes to impress Ms. Winfrey.
Foolish analyst David Meier recommended Deckers Outdoor to our Hidden Gems subscribers in August, 2004. "Great things happen when the income statement and the balance sheet improve in tandem," David said.
Green Mountain provides that new "new"
Keurig Green Mountain showed even fewer signs of obvious greatness in 2000. At first glance, it was just another run-of-the-mill coffee-producer in a packed field of competitors. The crucial buyout of the Keurig K-Cup single-cup coffee-brewing business was still six years away, and Green Mountain didn't buy K-Cup bean pod specialist Diedrich Coffee until 2009.
But the company was already building the cash reserves that would allow it to make those game-changing buyouts later on. And Wall Street wasn't paying attention.
Everybody wants the full 33,000% megareturn, of course. But you could have jumped on the Keurig story in 2005 or 2010 -- many moons after those crucial buyouts -- and still eclipsed Apple's returns in the iPhone era.
Like Deckers, Green Mountain soared on a singular event that nobody saw coming. Unlike Deckers, this company made a conscious decision to bet the company on a brand-new opportunity, rather than depending on a moment of marketing magic.
And do you know who experienced a similar fundamental pattern before the stock took off? That's right -- Apple suffered through cash crunches and misanagement until Steve Jobs came back and breathed new life into his baby with the iMac and iPod product lines. The cash created in those early years formed the launching pad for the iPhone and iPad revolutions. And the rest, as they say, is history.
The big, Foolish takeaway
There ain't no such thing as a free lunch, and the huge rewards available to microcap investors also come with big risks. As the examples above show, sometimes you need a decent helping of luck alongside a fundamentally strong business. And it doesn't always work out. If you invest this way, or devote a portion of your portfolio to the itty-bitty, high-growth style, you'll need to do your homework and accept a few losses along the way.
But as much investor wealth as Apple has created over the years, there are many ways to beat the market. Sometimes that involves finding the next big thing before all of Wall Street finds out about it.
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The article How Dozens of Unknown Small-Caps Crushed Apple in the Heyday of Its Growth originally appeared on Fool.com.Anders Bylund has no position in any stocks mentioned. The Motley Fool recommends Apple and Keurig Green Mountain. The Motley Fool also owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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