• A Fool Looks Back
• Doubling Down on Danger?
• How to Turn a Water Heater into a Ferrari
• Is Buffett Watching Your Stock?
• Six Signs of a Winner
• The Fool's Look Ahead
• You Can't Stop These Stocks

A Fool Looks Back

The open embrace of Jeff Bezos
It's all starting to come together, isn't it? This week, Amazon.com (Nasdaq: AMZN) acquired Shelfari, a social networking site for book lovers. The site will never challenge Facebook or News Corp. 's (NYSE: NWS) MySpace for traffic dominance. You won't find suburban girls making gang signs in front of a copy of A Tale of Two Cities. There's no overly flattering Photoshopped snapshot alongside a hardbound Great Expectations.

Shelfari's emphasis is on the books that its members have read, are reading, and want to read. This naturally makes Amazon a no-brainer buyer. It can sell members the books. It can get to know their tastes even better, improving its own recommendations engine in the process.

However, this may ultimately be about the Kindle. This is Amazon's big bookworm bet, a proprietary e-book reader that needs to achieve critical mass if it wants to make a difference. With a recent promotion marking down the Kindle to as little as $259 and whispers of upgraded versions on the way, Amazon knows that it needs to strike quickly. If fickle consumers move on, Amazon may never be able to introduce another branded gadget.

This is where Shelfari comes in. If book lovers are congregating anywhere in cyberspace, Amazon is going to want their undivided attention. The company wouldn't be silly enough to attempt to ram the Kindle down a literary person's throat, but the more street cred that Amazon wins with the bookworms, the easier it will be to make the Kindle ubiquitous.

Briefly in the news
And now let's take a quick look at some of the other stories that shaped our week.

Until next week, I remain,

Rick Munarriz

Doubling Down on Danger?

Exchange-traded funds come in all shapes and sizes. If a basket of equities or commodities exists, these days there’s an ETF that tracks it -- sometimes to the tune of twice the rate of the underlying benchmark. “Leveraged” ETFs, as they’re known, use debt to juice returns -- a great plan when the market is on the rise, but not such a sound strategy when it swoons.

And guess what? Soon, the market’s ETF assembly line will begin rolling out vehicles that step on the gas even harder, in order to deliver triple the underlying index’s daily return. 

Go Speed Racer?
Our advice? Don’t get behind that wheel.

True, 3X vehicles have the potential to jolt a moribund portfolio to life. However, they could also finish it off once and for all. See, the leveraged funds double the daily return, not the annual return.

Say the market gains 10% one day and loses 10% the next. The 1X investor will have lost 1%. The 2X investor will have lost 4%. And the 3X investor will have lost 9%.

What's more, because of the expense ratio shareholders pay for the privilege of riding these bucking broncos, an investor's shot at actually doubling -- or tripling -- her money come in two flavors: slim and none. 

With leveraged ETFs, the upside potential isn't quite as sweet as the downside risk is sour.

True confession

That said, I still believe there's a responsibly Foolish way to put these puppies to good use. Indeed, I run point on a Fool service -- Ready-Made Millionaire -- that includes a 2X ETF in its real-money lineup.

Make no mistake: The inclusion of this high-octane ETF is far from a market-timing bet. Instead, at the margins of our Ready-Made portfolio, we were able to essentially double up on our exposure to an area of the market that, as I detail below, looks very attractively valued right now.

While I believe that it’s possible to use leveraged ETFs responsibly (i.e., for intelligent asset allocation purposes and opportunistic valuation plays), I think 3X ETFs court a disaster of portfolio-crushing proportions. Instead, if you’ve got a leverage itch to scratch, stick with the 2X flavor -- which are revved up enough -- and then use them only in small, judicious doses.

Throw it in reverse?
By the way, that goes double for amped-up short vehicles. (Alas, they're readily available, too.)

The market’s long-term trajectory is "up," after all. While short ETFs can be convenient tools for reducing your net equity exposure without racking up a nasty capital-gains tax bill, doubling down on a short bet strikes me as the investing version of Evel Knievel's infamous Snake River Canyon gambit. That’s a long way to fall, daredevil.

Better by far to keep your short bets modest; again, use them for smart asset allocation and tax efficiency. Making bets on the short-term direction of the market -- as the last 12 erratic months have made clear -- is a loser’s game. Indulging in leverage to do so means doubling down on danger.

Impressive, no?
So why have I invested The Motley Fool's money in this 2X ETF? For one thing, it includes Activision Blizzard (Nasdaq: ATVI) and Intuitive Surgical (Nasdaq: ISRG) in its lineup, both financially sound companies with outsize potential. Each boasts earnings-growth estimates in excess of 20% over the next five years.

Pride International (NYSE: PDE) also makes our ETF’s cut, and while this mid-cap oil and gas driller competes against such big boys as Diamond Offshore Drilling (NYSE: DO) and Transocean (NYSE: RIG), it has ample room to run. Indeed, despite annualized earnings growth of roughly 91% over the last five years, the company sports a P/E that hovers close to single-digit territory.

That's also true of Helmerich & Payne (NYSE: HP), another member of our ETF's portfolio. This firm has posted even better profit growth over the last five years -- it just misses the triple-digit mark, in fact -- while playing in a sandbox that includes the well-heeled likes of Nabors Industries (NYSE: NBR) and Noble (NYSE: NE).

In other words, this leveraged ETF enables me to double my exposure to a segment of the market I'd be thin on otherwise -- and it does so by investing in companies I believe in.

The Foolish bottom line
If you've been looking for wealth in all the wrong places, click here to learn more about Ready-Made Millionaire and to snag your free copy of The 11-Minute Millionaire. This special report comes packed with information that can help you zero in on just those investments worth building your nest egg around. If you're a busy investor who hates losing money -- and aren't we all? -- you'll want to commit this one to memory.

Shannon Zimmerman runs point on the Fool's Ready-Made Millionaire service. Activision is a Motley Fool Stock Advisor recommendation. Intuitive Surgical is a Rule Breakers pick. You can check out the Fool's strict disclosure policy right here.

How to Turn a Water Heater into a Ferrari

Did you know that $1,000 invested in Altria in 1980 would be worth $233,000 today with dividends reinvested? In other words, if you'd forgone an expensive VCR back then for a boring stock investment, you could have a Ferrari now.

Of course, Altria is an exceptional stock, but if you want a shot at turning $1,000 today -- about the price of a basement water heater (not that we're suggesting you forgo hot showers) -- into a few hundred grand as quickly as possible, where should you be investing to maximize your odds? I'll have some advice for you later -- as well as seven stocks to check out -- but first, let me take you through the process of making this kind of money in the stock market.

Step 1: Ignore the hype that you secretly want to believe
Sure, we hear cocktail-party stories about the guy who turned a quick fortune in some biotech or Sino wonder-stock (N.B.: If you've got any tips, send 'em my way). But this is not reality for most. For every winner, there could be dozens of losers, and odds are you own one of them. But as you'll see below, dividend stocks help stack your odds significantly.

Step 2: Befriend the dorkiest guys you know
These are the people who are doing studies of what's actually proven effective in the market. You should listen, because you've worked hard for your money -- too hard to squander it.

You don't need a study to show that Altria is an aberration. Most dividend stocks don't perform that well. Altria's a best-case scenario, but it's still noteworthy that studies soundly confirm dividend investing to outperform non-dividend investing by a hefty margin.

For instance, according to a Morgan Stanley report, stocks paying dividends delivered nearly six additional percentage points of return annually from 1970 to 2005.

Given the rough economy, it's nice to know that dividend stocks are shown to outperform in declining markets. A paper by Fuller and Goldstein found that in down markets from 1970 to 2000, dividend stocks beat non-payers by 1.5% per month -- and did so with less risk!

There are many more studies, but I'll move on for now.

Step 3: Decide whether you're a man or a mouse
Or a woman or a mouse, to extend the phrase. And being a mouse isn't bad. In fact, given that investors often aren't rewarded for taking on additional risk, being a mouse can be downright smart. Dividend stocks are great places for security-seeking investors. If that's you, dividends can be your equivalent of a cheese buffet.

Ignore the misconception that dividend-paying companies are slow and stodgy. It's incorrect. In fact, if you're a maverick, you're in luck: Dividend stocks come as risky as you want 'em -- from a stable utility to a power-packed yielder like Frontline .

Of course, only an idiot seeks risk just to seek risk. (OK, I do that sometimes.) In investing, risk tends to mean higher return potential, and as noted above, Fuller and Goldstein found higher returns with lower risk with dividend stocks. In short, more bang for your risk-adjusted buck.

Let's look at some stocks
I used Capital IQ, an institutional software package, to screen for dividend payers with betas greater than 1 -- indicating that they've been more volatile than the market. Risk, being a future concept, can't be measured. But past volatility (measured relative to the market) is a decent approximation. For stability, I chose companies with yields greater than 2% and market caps of at least $1 billion. I required a payout ratio -- using free cash flow instead of earnings for accuracy -- of less than 90%. While not formal recommendations, these stock ideas can provide starting points for further research.

Company

Beta

Yield

Market Cap (billions)

Nokia (NYSE: NOK)

1.1

3%

$94

Caterpillar (NYSE: CAT)

1.3

2.4%

$43

For balance, how about a stab at the other side of the coin -- dividend stocks a bit safer than average? I kept the same criteria as above, but I selected stocks with betas of less than 1. (Beta is a measure of a stock's volatility relative to that of the S&P 500, which by definition has a beta of 1.) Here are the results:

Company

Beta

Yield

Market Cap (billions)

ConocoPhillips (NYSE: COP)

0.9

2.3%

$126

Sanofi-Aventis (NYSE: SNY)

0.4

4.3%

$97

Northrop Grumman (NYSE: NOC)

0.6

2.3%

$23

Kraft (NYSE: KFT)

0.7

3.4%

$48

Dividend stocks: cheese for the thinking mouse or maverick
Turning $1,000 into a Ferrari is an obvious long shot, but there are people investing right now -- this very day -- who will do just that. Some will do better. The key lies in finding the right stocks. I haven't found the all-powerful secret to that yet, but I try every day in our Motley Fool Income Investor dividend-stock investing service.

If you'd like more than a starting point with dividend-stock investing (such as full recommendations, updates, and tracking), take a free guest pass to the Income Investor service. It's beating the S&P 500 by seven percentage points to date.

This article was originally published May 16, 2008. It has been updated.

James Early owns no stocks mentioned in this article. Kraft is a Motley Fool Income Investor recommendation. The Motley Fool has a disclosure policy.

Is Buffett Watching Your Stock?

One big reason the Berkshire Hathaway annual meeting attracts 30,000-plus shareholders and fans is that anyone who stands in line has a shot at asking the master investor a question. Want to know why Buffett has never purchased shares of his good friend Bill Gates' company? Go ahead and ask him. Want to know what he thinks of the presidential candidates? He'll answer it.

Simple question, important lesson
This year, the most interesting Q&A concerned Berkshire's big purchase of PetroChina a while back. According to an article in Forbes, Buffett bought the shares after minimal due diligence. And I mean minimal. In fact, it was reported that all he did was read a couple of annual reports.

A shareholder stood to ask him -- and I'm paraphrasing here -- "Dude, what's the deal with that? How could you make such a large purchase with only the annual reports, without seeing the operations or meeting management?"

That's a fair question. How could Buffett, a man who has spoken at length many times about the vital importance of good management, buy a major chunk of this Chinese national company, sight unseen?

Stories are simple when the price is right
Buffett replied that the oil business is "not that hard to understand." So once he came to the conclusion that PetroChina was worth about $100 billion but was selling for only $35 billion, the decision pretty much made itself without the need for details. It would have been a lot different, he said, if he thought it was worth $35 billion but was selling for $40 billion.

He explained that he's looking for precisely these kinds of investments all the time. If ExxonMobil , (NYSE: XOM), Chevron (NYSE: CVX), or BP (NYSE: BP) were trading at what looked like half-price, the response would be immediate. But at the time Buffett was watching PetroChina, China Fever had yet to take hold with the world's stock buyers, and that explained the discount. For Buffett, it was a no-brainer. "It should hit you between the eyes," he said, adding that if your investment thesis requires you to carry an analysis out to three decimal places, it's not a good idea.

Back to basics
Buffett was referring to the "margin of safety." Most commonly, it describes a percentage difference between what a company is selling for on the market and what you think it's actually worth. If you're buying stocks that look only moderately underpriced, say 5%-10%, then you have to be very, very certain that your numbers are correct. You also need to know a lot about management, competition, and whether the company HQ sits in an asteroid's path.

Unfortunately, no matter how diligent you are, you will never know it all, and you'll inevitably make mistakes. That's why the margin of safety is so important, and the fatter that margin of safety is, the less you need to worry about getting the details precisely right or wrong. Interested in a fallen financial like Citigroup , Capital One Financial (NYSE: COF), or Bank of America (NYSE: BAC)? You'd better know everything about their balance sheets, management, and future prospects -- and that's an impossible task these days. The guys running these banks have no idea what their assets are worth.

That's why Buffett likes the simpler stories, and that's why you should, too.

One way Buffett ensures that he has a good margin of safety on a simple story is to concentrate on industries in which some players have big competitive advantages. Protected national champions such as PetroChina fit that bill. So do strong brand names with deep moats. Buffett's big score with Coca-Cola came at a time when the entire world thought "New Coke" had killed the brand, but Buffett knew consumers would come back to what they'd trusted for years. Strong brands like those at Coke and PepsiCo (NYSE: PEP) usually weather storms well, even the ones we're seeing today, so when the stocks do break down, it's a simple decision to buy.

Foolish final thought
How did PetroChina work out for Buffett? Pretty well, but let's not do that math. Let's forget the winnings of the super-investors for a second and look at what it did for simple, nonbillionaire geniuses like you and me.

I came to a similar conclusion on PetroChina a while after Buffett did, and I got my shares for about $90 each. A year and a half later, they were selling for nearly $250, a good deal more than I figured the company was worth. I sold, pocketed a 180% gain, and looked elsewhere for simple stories with similar margins of safety. I wasn't aiming to emulate Buffett, but I'm pretty sure remembering this lesson will make me a better investor. You don't have to sweat the details when the discount is big enough, and in today's market, there are plenty of bargains.

Finding margins of safety like these is the primary goal of my colleagues at Motley Fool Inside Value. Like Buffett, advisor Philip Durell isn't afraid to wade into the panicky market and hold businesses. In fact, Philip attended the Berkshire annual meeting this year and has his own tales to tell. To take a look at what he learned, and how it informs his investing decisions, a free trial of Inside Value is just a click away.

At the time of publication, Seth Jayson had no position in any company mentioned here. Berkshire Hathaway and Coca-Cola are Motley Fool Inside Value recommendations. Berkshire is also a Stock Advisor pick. Bank of America is an Income Investor selection. The Motley Fool owns shares of Berkshire and has a disclosure policy.

Six Signs of a Winner

The month is October ... the year is 1988. As the underdog Los Angeles Dodgers are shocking the Oakland A's in the World Series, Progressive Insurance is trading at $25. Adjusted for splits and dividends, that's around $0.58 per share.

Today, as another baseball season moves toward the playoffs, Progressive trades for around $18.50. In other words -- even with the wild market swings and the current bloodletting on Wall Street -- it's been more than a 30-bagger over the past 19 years, turning a $5,000 investment into roughly $160,000. We believe there are several lessons to be drawn from the Progressive story that will help your future investing performance -- and that have helped our strong performance in Motley Fool Hidden Gems. We'd like to share them with you today.

1. The power of patience
Meaningful gains do not happen overnight, of course. In late 1988, George Bush had just won the presidential election. George H.W. Bush, that is -- the current president's father. That's certainly not ancient history, but the point is that it took a long time for Progressive to increase this much in value. Time and patience are two of the most important factors in investing, and they can help overcome mediocre performance thanks to the power of compounding returns.

Consider that a person contributing $2,500 yearly to an IRA and earning an excellent average annual return of 15% will accumulate about $116,000 after 14 years. Yet someone who started investing just four years earlier will nearly reach the same total by earning an average return of only 10%. The important thing is to simply get in the game as soon as you can. Once you're in, hurry up and be patient.

2. Small is big
Back before it started its fantastic run, Progressive was valued at just $300 million -- a small cap by any measure. Today's future 30-baggers will also be small companies. They won't carry Citigroup 's $103 billion market cap, for example. While Citigroup may very well provide solid returns over the next few years, its massive size will limit it from achieving jaw-dropping gains. Progressive itself can't even be the next Progressive, because it now sports a $12.5 billion market cap. While it's not nearly as big as Citigroup, it's still too big to achieve stunning gains in the future.

Small companies offer individual investors like us many other advantages. Most institutional investors, with billions of dollars to allocate, must avoid small caps -- at least until they grow larger. That makes small caps underfollowed and increases the chances that they're misvalued. To see why, consider an analogy we've used before. The less activity in a marketplace or auction house, the higher the probability of pricing inefficiencies. When there's only one bidder for an autographed Michael Jordan game jersey, the chances for mispricing are infinitely higher than when thousands of investors bid every day -- every hour -- on the present price of, say, Alcoa (NYSE: AA) stock, which trades some 13 million shares each day on average. That inefficiency provides opportunity for us smaller investors.

3. A penny saved
Progressive was never a penny stock trading below $1 per share. Future 10- and 100-baggers -- at least the ones we care about -- are most often trading between $5 and $50 per share. They're rarely below $5, and they certainly aren't below $1.

Penny stocks represent ultra-tiny companies whose shares can easily be manipulated by unscrupulous people misrepresenting the businesses' true potential. In short, stay away from stocks that aren't traded on one of the major U.S. markets (the New York Stock Exchange, Nasdaq, or American Stock Exchange), that have no revenue, or that are obviously being hyped via email or discussion boards. You'll save yourself a ton of grief.

4. Dandy dividends
In our research, we're constantly studying past big winners to find the common ties that bind them. Retailer Wal-Mart (NYSE: WMT), insurer American International Group (NYSE: AIG), and diversified General Electric (NYSE: GE) all have different business models and different capital structures. All, however, have trounced the market over the years and have paid dividends ever since they were small companies.

Just because a company is small and pays a dividend, though, doesn't mean it's destined for greatness. But a dividend is a positive indicator, a telling sign of both financial strength and management's confidence that the business will continue to be solid through good times and bad. Progressive began paying its dividend back in 1986, when it was still capitalized at around $250 million.

5. Shareholder-friendly
In any company we research, we believe it's extremely important that management's interests be aligned with those of the shareholders. While investors want to see their shares outperform over the years, managers who are indifferent to the stock price may be more interested in hiring friends and grabbing perks than creating value. Former Tyco International (NYSE: TYC) CEO Dennis Kozlowski, for instance, had a $17,100 "traveling toilette box," a $15,000 umbrella stand, and a $6,000 shower curtain in his company-furnished apartment! Shareholders were glad to see him go.

This is why we love to see strong insider ownership at a company. Amazon.com (Nasdaq: AMZN) CEO Jeff Bezos has owned a significant part of his firm during its wild and profitable ride, and he still owns more than 23%. Peter Lewis, Progressive's chairman and founder, still owns more than 7%. His stake is worth more than $850 million today. If you want to talk about leadership with a vested interest in a business' long-term success, this is the perfect example.

6. Boring excitement
So a world-class company like Progressive must be headquartered in New York, right? Or Hartford, Conn., the "insurance capital of America"? Nope. It hails from Mayfield Village, Ohio, in the eastern suburbs of Cuyahoga County, approximately 20 miles from downtown Cleveland. Low-key. Not flashy. A bit boring, even.

Reminds us of the early days of Wal-Mart, when the company didn't raise an eyebrow among big-time analysts. Wall Street treated Sam Walton's Arkansas boys like a bunch of hillbillies, it seemed. But these sleepy, small, "boring" companies -- with no hype built into their stock price -- can offer outstanding bargains to us individual investors.

Putting it together
Hidden Gems is now five years old, and our total average return during that time is 26%, compared with 4% for similar amounts invested in the S&P 500. If you'd like to check out all of our recommendations, plus more than 20 valuable investing lessons, we're offering a special 30-day free trial. Click here to give it a whirl.

This article was originally published on April 8, 2005. It has been updated.

Rex Moore helps the HG team pan for gems and moonlights as a bodyguard for Kimbo Slice. He owns no stocks mentioned in this article. Amazon.com is a Motley Fool Stock Advisor recommendation. Tyco and Wal-Mart are Inside Value recommendations. The Motley Fool is investors writing for investors.

The Fool's Look Ahead

Monday
Turn off CNBC. It's Labor Day. The market's closed. OK, technically it's the stateside markets that will be closed in observance of the holiday. It's business as usual for the rest of the world, including a few companies you may know, like France's Vivendi , reporting their quarterly results.

Tuesday
The market kicks off its shortened trading week on Tuesday. Filtration equipment specialist Donaldson (NYSE: DCI) reports at the end of the day. Wall Street sees the company's earnings climbing 15% to $0.61 a share for the period. Shareholders shouldn't be too worried. Donaldson has met or exceeded analyst expectations in each of the past 11 quarters.

Wednesday
If you're in the mood for Chinese growth stocks, Wednesday's got Shanda Interactive (Nasdaq: SNDA) and Mindray Medical (NYSE: MR) on the menu. Shanda is a fast-growing leader in Web-based multiplayer games, a very popular niche in the country's packed Internet cafes. Mindray makes medical devices. Both companies should post healthy quarterly results, with Shanda and Mindray investors expecting bottom-line growth of 21% and 11% respectively.

If you prefer your investments to be based closer to home, check out office supply superstore chain Staples (Nasdaq: SPLS) and tax prep giant H&R Block (NYSE: HRB). After you do, consider a little global diversification, because we live in a pretty big world these days.

Thursday
Glutton for punishment? Step right up to hear Toll Brothers (NYSE: TOL) chime in. The homebuilder has posted three consecutive losses, and Thursday's report will likely keep the red-ink streak going. If folks are having a hard time moving existing homes, it's going to be hard to move freshly constructed properties.

Friday
Few companies chance their earnings report on Fridays, much less on a holiday-shortened week. Get an early start on the weekend if you want. Head out to the multiplex to catch any of the summer blockbusters that you may have missed. The market can wait.

Until next week, I remain,
Rick Munarriz

You Can't Stop These Stocks

Long before GE was a global leader in financial services and health care, a major TV studio and water purifier, and a pioneer in the alternative energy and green technology spaces, GE was General Electric -- a Schenectady, N.Y.-based maker of electric lighting and appliances.

Yes, this was high technology back in 1892 when the company was founded (with roots back to Thomas Edison), but had GE stuck to its knitting in that niche, it would not be the nearly $300 billion conglomerate we know today. In fact, GE recently announced that it plans to sell its appliance business, and I've heard rumors that it also plans to get out of the legacy lighting business, due in part to pressure from low-cost Chinese manufacturers.

No way to conquer the world
Instead of being content as a lighting company, the people at GE decided to be an idea company. That's why GE became such an incredible success. Though it has struggled of late, the company has still crushed the market over the trailing 20-year period, turning $1,000 in 1998 into more than $14,000 today.

What gave GE the flexibility to move up the value chain? Besides hard work and know-how, it was the company's bulletproof reputation for high quality. In other words, it was the company's brand.

Big brands, big money
But GE isn't the only company that parlayed success in a single niche into global domination. Consider Charles Schwab (Nasdaq: SCHW), which was founded as the original discount broker, but soon became an asset manager. How did a company become so trusted? The answer, of course, is brand.

Brand is also the reason Apple (Nasdaq: AAPL) was able to transition from computers into music, television, and who knows what next.

And finally, if Eastman Kodak (NYSE: EK) is ever able to recover from its malaise and move into the new technological era, it will only have been given the time to do so because it was once the dominant photography brand.

This is not a new phenomenon
While GE, Schwab, Apple, and Kodak have all leveraged their brands in different ways, the importance of a good brand to a business is not a new discovery. The Atlantic recently reported on a National Bureau of Economic Research paper by Gary Richardson called "Brand Names Before the Industrial Revolution."

Richardson found that even in medieval markets, "Buyers were willing to pay more for goods that came from reputable outlets, and this encouraged manufacturers to fashion their products with identifying features."

Entrepreneurs found out fast that brands are why companies can expand geographically, expand their product lines, and earn outsized returns for shareholders. After all, without its sterling brands, General Mills (NYSE: GIS) would just have a product portfolio of easily replicable grains and sugars. That's no way to make the $1.2 billion in profits General Mills banked over the past year.

There's gold in them thar logos
It turns out that a strong brand is one of the few sources of sustainable competitive advantage in this world. And while brands can be difficult to value (the best way is to estimate their replacement value, or how much it would cost a competitor to earn the same trust and mindshare from consumers), they are one of the core traits we look for to find promising small-capitalization stocks for our Motley Fool Hidden Gems subscribers.

After all, if you can find a small company with a big brand, then that company has a much better than average chance of becoming a big company along the way. Sure, they could mess it up (things like profits and a strong balance sheet still matter), but a strong brand is a significant head start.

Companies with that head start
This is why MercadoLibre (Nasdaq: MELI), Design Within Reach (Nasdaq: DWRI), and Lumber Liquidators (NYSE: LL) have all popped up on our Hidden Gems radar at one time or another. Each is capitalized at less than $2 billion, and yet how many other Latin American auction platforms can you name off the top of your head?

If you're looking for more small companies with powerful long-term brand potential, sign up for Hidden Gems free for 30 days and see all of our research and recommendations. Our picks are beating the market by 23 percentage points on average, and you have no obligation to subscribe. Click here for more information.

This article was originally published on June 20, 2008. It has been updated.

Tim Hanson does not own shares of any company mentioned. Apple and Schwab are Motley Fool Stock Advisor recommendations. Writing witty lines about our disclosure policy is one of The Motley Fool's branding strategies.