5 Top Tweeners

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

Neither an up-and-coming superstar nor a dominant veteran, tweeners are poised precariously in between. They're not as hot as they once were, and they're vulnerable both to young upstarts and old stalwarts. But they've honed their skills enough to remain a force to be reckoned with.

The stock market has plenty of tweeners. 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 almost was. That's the problem -- investing in tweeners can be dangerous and exceptionally profitable. By picking his winners well, David Gardner 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 are the latest contenders:

Company

CAPS Rating (out of 5)

5-Year Growth Estimate

RiskMetrics Group (NYSE:RMG)

***

46.0%

VistaPrint (NASDAQ:VPRT)

***

35.0%

ViaSat (NASDAQ:VSAT)

***

18.8%

Whole Foods (NASDAQ:WFMI)

***

19.2%

Morningstar (NASDAQ:MORN)

***

24.0%

Sources: Motley Fool CAPS, Yahoo! Finance.

Bear in mind that this isn't a list of recommendations -- merely candidates for further research.

Most of these stocks are intriguing for their valuations. VistaPrint, for example, trades for 25 times current-year earnings for a 0.72 PEG ratio. ViaSat's PEG is an equally small 0.79.

Whole Foods isn't quite that cheap, but after devouring Wild Oats, its primary national rival, I'm not sure it needs to be. What it does need is a turnabout in return on capital, which fell nearly four percentage points in fiscal 2007 and is still falling today.

Catch a rising Morningstar
Mutual-fund maven Morningstar saw its own ROC decline somewhat from 2005 to 2006, but its current return -- 21.8% for 2007 -- is outstanding. Margins, meanwhile, are still on the rise:

Metrics

2007

2006

2005

2004

Gross margin

73.9%

72.4%

71.6%

69.5%

Net margin

17.0%

16.4%

13.7%

4.9%

Source: Capital IQ, a division of Standard & Poor's.

Impressed? You're not the only one. CAPS investor Tainerman wrote this in pitching the stock last week: "Massive database and huge brand give Morningstar a large competitive advantage and provide large barriers to entry for competition. High margins, pricing power, and good management make the company profitable and fuel growth."

The database he's referring to is a massive collection of research on America's mutual fund industry. The information within is closely guarded, informing Morningstar's proprietary and highly coveted star ratings. My guess is, with fears of recession looming, those ratings will become even more treasured as investors turn to top funds to secure their retirement savings.

But management in particular may be the least heralded of Morningstar's advantages. Why? CEO Joe Mansueto still owns more than 60% of the business, giving him ample incentive to work toward higher returns.

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

See you back here next week for five more top tweeners.


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