5 More Unloved Growth Stocks

Ah, the joys of skepticism.

We rebel investors at Motley Fool Rule Breakers believe the multibaggers in the making, while not often cheap by the numbers, are always misunderstood. The extraordinary skepticism they face makes them excellent value stocks.

Hitting just one of these home runs can make all the difference to your portfolio. Just ask David Gardner, who bought Amazon.com at a split-adjusted price of $3.24 a share in 1997. He's up more than 2,400% since.

Stocks like Amazon helped David produce nine years of better-than-20% average annual returns in the real-money Rule Breaker portfolio, even while suffering stinging losses from Guitar Center and 3Dfx, among others.

Let the haters be your friends
David continues this home-run investing tradition today at Rule Breakers. You can follow the moves of his rebel alliance with a free trial to the service. Or, if you prefer to pick your own stocks, there's Motley Fool CAPS, a 100% free stock-picking community whose 105,000-plus participating investors rate stocks on a scale of one to five stars. More than 5,600 rated companies are in the database right now.

How can this help you? Each week, we'll use CAPS to search for one- and two-star stocks that have at least 5% of their available shares sold short, but which are expected to grow their earnings by no less than 15% over each of the next five years.

Let's have the list
Here are today's unloved growth stocks:

Company

CAPS Rating (5 max)

Short Interest

5-Year Growth Estimate

salesforce.com (NYSE: CRM  )

*

8.0%

44.8%

1-800-Flowers (Nasdaq: FLWS  )

*

14.4%

22.5%

Aeropostale (NYSE: ARO  )

**

18.6%

17.0%

Lennox Int'l (NYSE: LII  )

**

5.6%

16.5%

Longs Drug (NYSE: LDG  )

**

9.9%

15.7%

Sources: Motley Fool CAPS; Yahoo! Finance; Capital IQ, a division of Standard & Poor's; and wsj.com.

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

We've got some interesting choices here. Aeropostale is still bucking the trend, and it sports a terrific balance sheet and strong cash flow.

Cash flow? I'll show you cash flow!
But when it comes to free cash flow, few firms short of tech titans such as Oracle (Nasdaq: ORCL  ) produce the bounty that software-as-a-service (SaaS) star salesforce.com does. Behold:

Metrics (mil)

FY 2008

FY 2007

FY 2006

FY 2005

Cash from operations

$204.3

$111.2    

$95.9

$55.9

Capital expenditures

($43.6)

($22.1)

($23.4)

($4.3)

Free Cash Flow

$160.7

$89.1

$72.5

$51.6

Source: Capital IQ, a division of Standard & Poor's. The fiscal year ends on Jan. 31 of the named year.

Notice the growth. Foolish colleague Rich Smith said it best, I think, in reporting on the firm's blowout first-quarter financial results:

But the headline numbers aren't the only things to like about salesforce.com. Peer through the muddle of GAAP accounting with me, and I think you'll be impressed at all the free cash flow underlying the accounting earnings -- not to mention an increase in the former that's nearly as great as in the latter. Q1 2009 free cash flow dwarfed net earnings, as salesforce.com generated $59.6 million in free cash flow, fully $50 million better than it reported under GAAP. Growthwise, that represented a near-tripling in free cash flow at the company versus Q1 2008.

I agree, and I'll add that there's every reason to believe that salesforce.com will continue to grow FCF as it has. SaaS, you see, requires a capital-intensive buildup of servers, software, and storage in order to deliver data reliably. But this investment scales well over time, leading to -- yep, you guessed it -- mountains of moola.

Of course, that's my take. I'm more interested in what you think. Would you buy salesforce.com at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate.

See you back here next week for five more unloved growth stocks.

Amazon.com is a Stock Advisor selection. Try this market-beating service free for 30 days. There's no obligation to subscribe.

Fool contributor Tim Beyers, ranked 18,471 out of more than 105,000 participants in CAPS, also writes for Rule Breakers. Tim owned shares of Oracle at the time of publication. Click here for Tim's portfolio and here for his latest blog commentary. The Motley Fool's disclosure policy is your portfolio's competitive advantage.


Read/Post Comments (1) | Recommend This Article (1)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 03, 2008, at 6:09 PM, RVAspeculator wrote:

    Those potential "mountains of moola" better be just as large as you say with a stunning 481 current P/E and a 109 forward P/E. It seems as if they are pricing in Mt. Everest already.

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