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TheStreet Open House

7 Smaller Stocks Beating the Big Guys

MILLBURN, N.J. ( Stockpickr) -- When I was growing up, car rental company Avis (CAR): "We're No. 2, but we try harder" -- part of a massive campaign to capture business away from Hertz (HTZ), the idea being that just because you are the second-largest company does not make you second best.

Jim Cramer talks about being "best in class," whereby being the best is not the same as being the biggest. Rather, the best-in-class company is the one that does the best job in execution. And eventually, smaller companies could overtake larger ones in their sector because they are better.

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Of course, we have to be careful. Sometimes companies are second largest because they are indeed not the best. I call this the "second banana syndrome." Many second-banana companies have made it to my worst-run companies list. Advanced Micro Devices (AMD) is an example of such a company.

I've selected several stock pairings of the largest and second-largest companies within various sectors, and below I'll compare their performances from the market bottom on March 9, 2009 through the end of October 2011. My hypothesis in this comparison was that since the market bottom, when our economic future was most gloomy, good management teams would step up and try to take advantage of the gloom by readying themselves for what was certain to be an economic turnaround.

Furthermore, I posited that the second-largest companies had room to strategically expand or take the necessary actions in order to benefit from an economic turnaround, whereas the largest companies sometime found themselves in a position to cut back during the Great Recession.

Remarkably, in each and everyone one of the industry pairs, the second-largest company (as defined by market capitalization) had outperformed the largest company in that pair on a total return basis.

Without further ado, here are seven No. 2 companies that outperform their No. 1 competitors.

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