The Hidden Super-Stocks in Our Midst

Editor's Note: Jon D. Markman writes a weekly column for CNBC on MSN Money that is republished here on TheStreet.com. He's also a regular contributor to RealMoney, TheStreet.com's subscription site. If you'd like to see all of Jon Markman's RealMoney commentary, click here for information about a free trial.

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It's mid-December 1999. The stock market is rockin', and you're kicking back at the bar after work with your pals, throwing around ideas for stocks that will lead Wall Street over the next six years.

On your list are probably the usual Internet heroes, like eBay(EBAY Quote), and maybe a biotech, like MedImmune(MEDI Quote) or a fast-growing store, like Starbucks(SBUX Quote).

But boy, oh boy, would you have been wrong. The leading stock over the past six years, according to my calculations, makes just about the least exotic product you can imagine: soda pop. It's Hansen Natural(HANS Quote), which is up 3,739% since Jan. 1, 2000. And the next four best aren't exactly household names, either. They are:

KCS Energy(KCS Quote), a Houston-based natural gas producer, +3,251%.

IRIS International(IRIS Quote), a maker of automated urinalysis systems, +3,248%.

Amedisys(AMED Quote), a home nursing care provider, +3,181%.

Quicksilver Resources(KWK Quote), a Texas-based natural gas producer, +2,929%.

The incredible success of these unassuming businesses provides investors with valuable insights into the character of our age and what makes stocks go up.

It's obviously not glamorous-CEOs, hyped-up, investor-relations campaigns or sexy products, although none of those things will actually hurt. It's mainly about finding an underappreciated niche that's small enough to be ignored by much larger players -- and then developing a pipeline of products that can be sold for many years at relatively high margins to an increasing number of customers. All of these market-leading companies crush their peers on returns on capital and pricing power -- business fundamentals that allow them to continually grow into valuations that seem perpetually cheap.

After the Run-up, Still Cheap

Did I say cheap? That's right. Even though these five super outfits have walloped the market in the past six years -- the S&P 500 is down 12% during that stretch, while the Nasdaq is down 35% -- they are still relatively inexpensive because they continue to boost earnings faster than analysts can update their estimates.

Consider KCS Energy. The natural gas driller and developer is expected to earn $3.24 per share in 2006, up 47% from 2005. Yet its forward price-earnings multiple is just 8.4, which is about six times lower than it would be if investors really believed that kind of growth would materialize as expected.