5 Top Tweeners

If you've ever sought to get seriously rich from stocks, then you've owned a tweener.

A tweener, dear Fool, is like your pal Chuck. Still a great athlete, Chuck no longer rules the hardwood with his 40-inch vertical leap. He's become what we sports addicts call a gamer. He passes more. He's developed a nice shot from the corner. And though he doesn't dunk as much, or as spectacularly, as he did, Chuck is still a force in the paint.

What we fans don't know is how long Chuck will be in the starting lineup. Chiseled veteran Abe has a wicked hook shot that won't quit. And Larry, the little guard whose hip-shaking moves smoke defenders, has the makings of a future superstar. Both are vying to cut into Chuck's minutes on the floor.

In Foolish parlance: Chuck is a tweener, Abe is a Rule Maker, and Larry is a Rule Breaker.

Growing up is hard to do
The stock market has plenty of Chucks. They'll either create billion-dollar fortunes as they come to dominate industries, as Cisco and Microsoft have, or they'll be destroyed in the process, as Gateway was.

Therein lies the problem. Investing in tweeners can be dangerous and exceptionally profitable. The trick is picking your winners well, as David Gardner has. He produced nine years of 20% average returns hunting for misunderstood multibaggers in the making. His team at Motley Fool Rule Breakers continues the tradition today.

Let's have the list
You, too, can join in the effort, thanks to Motley Fool CAPS. Each week, we'll use the database to find three-star stocks that are expected to boost earnings by at least 15% annually over the next five years. Here's today's list:

Company

CAPS Rating

5-Year Growth Estimate

Calgon Carbon (NYSE:CCC)

***

15%

Discovery Holding A (NASDAQ:DISCA)

***

15.8%

Solarfun Power (NASDAQ:SOLF)

***

57.5%

Chipotle (NYSE:CMG)

***

26.6%

Sohu.com (NASDAQ:SOHU)

***

28.4%

Sources: Motley Fool CAPS, Yahoo! Finance

Bear in mind that this isn't a list of recommendations. Instead, I offer these stocks as candidates for further research.

You'd think that Solarfun, which recently raised its full-year revenue guidance, would top today's list. Here's why it doesn't: Three senior executives left the company last week, including the former CFO and principal accounting officer.

Nothing sinister appears to be occurring here, but I still question the timing. Solarfun's results have rarely been better, and solar stocks in general, including rocket stock Evergreen Solar (Nasdaq: ESLR  ) , have been thriving. Why let the top two numbers guys, both of whom needed only to renew their contracts, leave now?

Hungry for returns
We may never get an answer to that question. So let's move on to a business that's earning more fans with each passing day: Chipotle Mexican Grill. A pick of both the Rule Breakers and Hidden Gems services, Chipotle has two share classes.

That offers an intriguing advantage to the Foolish investor. You see, the B shares trade for roughly 15% less than the A shares, yet possess more voting rights. Call it a happy consequence of the chain's spinoff from McDonald's (NYSE: MCD  ) .

Nevertheless, with Chipotle trading for about 70 times trailing earnings, many are wondering whether portfolios holding its shares will soon suffer from severe indigestion. It's certainly possible; the numbers don't add up according to traditional valuation metrics, as fellow Fool Morgan Housel points out here.

Trouble is, old-school valuation rarely tells the whole story when it comes to excellent growth stocks, and Chipotle is surely in that category. Instead, let's look at the stock through a more optimistic lens, assuming that growth will persist as it has.

As of Sept. 30, Chipotle operated 668 restaurants, producing roughly $1.7 million in revenue each, according to filings with the SEC. At its present store expansion rate -- 23.9% -- Chipotle would have 1,270 restaurants within three years.

Now, let's say each of these locations continues to produce just $1.7 million in revenue -- a conservative estimate, since store-level sales have a history of double-digit growth. That would result in $2.16 billion in 2010 revenue, which would be worth around $9.3 billion in market cap if current price-to-sales multiples hold. Chipotle is currently valued at $4.45 billion.

See where I'm headed with this? Even though typical back-of-the-napkin valuations make the stock look expensive, Chipotle could still have room to double, and double again, if growth persists.

But that's my take. What's yours? Would you buy Chipotle at today's prices? Let us know by signing up for CAPS now. It's 100% free to participate.

See you back here Friday for five more top tweeners.


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