The top 10 companies in the S&P 500 Index today may look a lot different a decade from now…

The microcap space is a compelling investment universe. It doesn’t take much to send these stocks soaring. Even joining a major index, such as the Russell 2000, can attract a rush of investment dollars and give tiny stocks an attractive short-term pop.

However, the real reason microcap stocks can be so compelling isn’t just their potential for short-term gains. Microcaps can also be massive multibagger ideas in the long term.

They can become household names that dominate the S&P 500. It’s the ultimate rags-to-riches setup…

One year ago, we analyzed the U.S. mega-cap universe at Altimetry. We found that 100 companies had market capitalizations of more than $50 billion. Among those 100 names, nearly half had at one point been valued at less than $1 billion since 2000.

What’s even more telling is among the 47 names that were once microcaps, 10 have made the transition to mega-caps since 2000. This means the blue-chip companies we all know today weren’t always the obvious leaders… At some point, these companies were tiny firms that few understood.

At Altimetry, we’re focused on finding market opportunities that are only just beginning to realize their potential… in other words, the sort of companies that will outperform over the next decade or even longer.

The biggest winners of the past were those that dominated once-niche market trends. This is the key that helped their earnings explode – and stock prices soon followed…

A great example of a company that successfully followed the microcap rags-to-riches playbook is Intuitive Surgical (ISRG). It’s an innovative maker of robotic surgical equipment.

In February 2003, Intuitive Surgical sported a market capitalization of barely $100 million.

At the time, the company was trying to revolutionize the fields of urology and gynecology by introducing precision surgical machines to urologists and OB-GYNs.

This was an unproven technology. The idea was to take scalpels out of the hands of doctors and instead provide them with a machine they could control to perform the required surgery.

If it could perfect its technology, Intuitive Surgical believed it could expand its use cases beyond just urology and gynecology, transforming the entire surgery industry in the process.

Initially, the market was skeptical. It saw a company with high potential yet little tangible results. But eventually, the fundamentals began to take off.

In 2003, Uniform return on assets (“ROA”) – a measure we use to smooth out the distortions of traditional earnings numbers – improved from negative 17% to negative 2%…

The following year, Intuitive Surgical began steadily gaining traction as demand for its flagship da Vinci Surgical System took off. While revenue only grew from $92 million to $138 million, Uniform ROA shot up from negative 2% to 19%. (Meanwhile, the faulty as-reported metrics showed only a marginal improvement to 4%.) Take a look…

Once Intuitive Surgical’s emerging technology took hold, it was almost impossible to shake its grip. With real earnings rocketing higher, the stock price followed.

Today, the company generates more than $5 billion in annual revenue. And its stock trades around $330. That’s after the stock’s recent 3-for-1 split that took effect on October 5… Previously, the stock traded around $1,000 per share. Take a look…

A passive $10,000 investment in Intuitive Surgical back when it was a tiny, unproven microcap with great potential would now be worth more than $4 million.

You can see the power of microcap investing…

It’s much easier for a $100 million company to become a $1 billion-plus company than a $100 billion company to become a $1 trillion company. That’s why we focus so heavily on researching up-and-coming names. Because they start small, discovering just one great emerging business that meets its potential can transform your savings forever.

Regards,

— Joel Litman

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Source: Daily Wealth