By SARAH MORGAN
The stock market has had some tumultuous times in the two decades since SmartMoney Magazine was founded. Google went public, Pets.com crashed and burned, Lehman Brothers went bankrupt, Apple became the largest company in the world. But even through all the turmoil of the dot-com bust and the global financial crisis, there were a few stocks that would have delivered outstanding returns if you bought them in April 1992, when the first SmartMoney issues hit the newsstands.
To screen for the 10 best stocks of the past 20 years, we first limited the search to companies that were in the Russell 3000 index in April 1992. That index includes plenty of small-caps -- it tracks the 3,000 largest publicly-traded stocks in the U.S. -- but adds up to 98% of the investable market. Then we simply searched for the stocks that have produced the highest total return in those 20 years.
Of course, any investor who bought an index fund in April 1992 and held on through all the market's ups and downs would have done just fine: The S&P 500-stock index's total return of 382% since then means index fans have more than quadrupled their money. But a portfolio of the 10 best stocks of those two decades would have generated a total return of 9,839%. In other words, $1,000 invested in an S&P 500 index fund in April 1992 would be worth $3,820 today, but $1,000 invested in the 10 stocks on this list would be worth $98,393.
Investors would have had to do some serious digging to spot these big winners. Just an analyst or two have been following some of these stocks for more than 10 or 15 years, but most would have been relatively obscure in 1992. Some of these stocks are still mid- or small-caps today, which means they likely were micro-caps in 1992, notes Paul Larson, the chief equities strategist at Morningstar. "If you want to have a company that goes up 50- or 60-fold, it's very difficult to do that if you're owning a large-cap stock," Larson says. Smaller stocks are riskier, but "if you find the right one, you can certainly get some spectacular returns," he says.
And some sectors are also more likely to generate big winners. Experts point out that your chances of hitting a home run with a tech or biotech micro-cap is much higher than owning ho-hum real estate or utilities. On the flip side, your chances of losing all of your investment also increases.
Different qualities led to outstanding returns in different industries. For the biotech firms on the list, the key was starting with one blockbuster drug and then developing improved versions of it to extend the marquee brand while developing completely new treatments. For manufacturers, the companies that won out jumped on a growing industry and then grew market share within that growing pie. Being part of a life-altering technology like mobile phones doesn't hurt, but having a patent on a crucial piece of that technology is even more rewarding.
That said, to get that 9,000% return, investors would have had to put up with serious downturns from several of these stocks. Some fell hard in the dot-com bubble and have never fully recovered -- but they've still managed to multiply investors' money 80 or 90 times over.. Apple's roughly 3,000% return doesn't make the cut -- but two of these companies do help build your iPhone. Here's the list:
- Total return since April 1992: 6,004%
This commercial aerospace supplier makes things like the TV screens that fit on the back of airplane seats, or the power outlets that let travelers plug in their electronics in flight. Its stock price actually peaked in 2007, at nearly $50 a share; it's worth a little under $33 a share today.
#9: Celgene Corporation
- Total return since April 1992: 6,244%
This biotech firm's success is mostly due to the drugs it makes for treating a type of blood cancer called multiple myeloma. "It's been a great company, and an amazing portfolio of drugs," says Ian Somaiya, a biotech analyst at Piper Jaffray, who says he's been recommending the stock for 15 years. The blood cancer drugs, Thalomid (also known as thalidomide) and Revlimid have significantly increased the life expectancy of patients with this condition, and Revlimid, an analog to thalidomide, reduces its side effects, Somaiya says.
#8: Biogen Idec
- Total return since April 1992: 6,334%
The growth of this biotech stock hasn't been quite as steady as Celgene's, but shares have doubled since 2010. The company is best known for its multiple sclerosis drugs, Avonex and the newer treatment Tysabri. The recent run-up in the shares is largely due to unexpectedly good clinical data on a new pill (instead of an injectable treatment) for MS, Piper Jaffray's Somaiya says. "It was one of those rare events in biotech where you just are utterly surprised with the benefit of a drug," he says. Biogen Idec (BIIB)
- Total return since April 1992: 8,601%
Twenty years ago, this company simply distributed semiconductors. In the late 1990s, they became the exclusive U.S. distributor for a manufacturer called Lite-On, and then used the cash from that business to expand into manufacturing their own semiconductors, says Gary Mobley, a senior analyst with the Benchmark Company.
Most of Diodes' (DIOD)
- Total return since April 1992: 8,571%
Back in March 2000, a Morningstar analyst wrote: "While Oracle's (ORCL)
- Total return since April 1992: 9,232%
This chipmaker also peaked in 2000, at roughly $75 a share, although it's since climbed back to about $62 a share today. "Qualcomm has done exceptionally well," says Vijay Rakesh, an equity analyst at Sterne, Agee & Leach. The company developed a technology called "code division multiple access," or CDMA, a key part of wireless networks. The many patents it holds on this technology allow it to collect royalties from almost every mobile handset maker. Qualcomm (QCOM)
#4 EMC Corporation
- Total return since April 1992: 9,624%
Another tech firm that fell hard after the dot-com bust, EMC Corporation's shares were actually worth more than three times their current price of $28 in 2000. But this data-storage firm has been able to maintain a strong competitive position in a rapidly changing industry. Back in 1999, a Morningstar analyst noted that "the Internet is fueling a huge increase in the demand for data storage, since every mouse click on the Web creates a nugget of data that companies want to be able to store and analyze." EMC Corporation (EMC)
- Total return since April 1992: 10,423%
"Two-Six" primarily sells components for lasers called "optics." Optics are like razor blades -- a key part of the overall equipment that regularly needs to be replaced, says Mark Douglass, a senior equity analyst with Longbow Research. The use of lasers in industrial manufacturing has grown multiple times faster than GDP since the 1990s, so "they were basically riding the wave," Douglass says. II-VI (IIVI)
- Total return since April 1992: 14,330%
Most of this commercial cooking equipment manufacturer's growth has been concentrated in the past decade. Middleby (MIDD)
#1 Kansas City Southern
- Total return since April 1992: 19,030%
Aside from falling along with the rest of the market in 2008 and 2009, this stock has been climbing steadily since the late 1990s. But back then it looked a little different. "It was a conglomerate, and it was a weird conglomerate: It was a railroad and a money management firm," explains Morningstar's Larson. In 2000, the money management firm was spun out into a separate entity, now trading as Janus Capital Group (JNS)