The Growth Stocks You Should Be Buying

We all know the legends of growth investing. But I submit that growth grabbers can learn as much from a single phrase from Warren Buffett -- the patron saint of value investing -- as they might from the writings of Lynch and Fisher:

Be greedy when others are fearful.

I take this as a call to rebellion -- to invest where others won't. To zig as timid stock pickers zag. To order fish when the surrounding company chooses steak. And to buy stocks that cheapskates fear, such as iRobot (Nasdaq: IRBT  ) , because they're the best value stocks available.

Let the haters be your friends
We pursue these misunderstood multibaggers in the making at Motley Fool Rule Breakers under the guidance of Fool co-founder David Gardner. You can follow our market-beating moves with a risk-free trial to the service.

Or, if you prefer to invest on your own, there's Motley Fool CAPS, a 100% free stock-picking community whose 110,000-plus participating investors rate stocks on a scale of one to five stars. More than 5,500 rated companies are in the database right now. Any of them could be a 10-bagger in the making.

To me, the best of these are high growers -- expected to improve earnings by 15% a year over the next five -- that have been heavily shorted. Firms with 5% or more their available shares sold short can blast off like a rocket when the skeptics are proven wrong.

Let's have the list
Here's today's list of growth stocks that others fear:

Company

CAPS Rating

Short Interest

5-Year Growth Estimate

EMCORE (Nasdaq: EMKR  )

**

39%

30%

Ruth's Hospitality Group (Nasdaq: RUTH  )

**

20%

17.1%

Priceline.com (Nasdaq: PCLN  )

**

26.2%

26.7%

Rackable Systems (Nasdaq: RACK  )

**

10.5%

16.5%

Blue Nile (Nasdaq: NILE  )

**

51.3%

21%

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. I'm hooked on priceline.com -- and not just because of Bill Shatner's "Negotiator" commercials. Blue Nile, a Rule Breakers recommendation, is less attractive because of the downturn in consumer spending.

Rack 'em up
Which of these is worth buying now? I like Rackable Systems, which combines servers and storage in a portable, power saving box that Web businesses seem to love.

Ask Facebook. Rackable's gear helps the social superstar serve more than 80 million active users. Color me unsurprised. Power doesn't come cheap now that oil and coal prices are rising, so efficiency matters.

I'm not the only one who thinks so. "Getting out of my circle of competence here, but this stock seems cheap," Foolish colleague Tim Hanson wrote in December. "I think we're looking at a future of disposable servers that are also energy-efficient."

But is the stock really cheap, as Tim asserts? I think so. At current prices, investors are paying $1.03 for every dollar of Rackable revenue. Here's what that means in English: as a group, investors expect little revenue growth -- even though Facebook is adding enough infrastructure to support 250,000 new users per day.

I think they're crazy. But I'm more interested in what you think. Would you buy Rackable Systems 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 misunderstood multibaggers in the making.

Blue Nile and iRobot are Rule Breakers recommendations. Priceline.com is a Stock Advisor selection. Try either of these market-beating services free for 30 days. There's no obligation to subscribe.

Fool contributor Tim Beyers, ranked 20,055 out of more than 110,000 participants in CAPS, is also a member of the Rule Breakers team. The Motley Fool's disclosure policy is your portfolio's competitive advantage.


Read/Post Comments (1) | Recommend This Article (4)

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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 July 14, 2008, at 4:15 PM, hohohoruth wrote:

    thanks for publishing this, maybe now some fools will bail us out of this mess.

    keep hearing that ruth is a great investment opp, but every week the share prices drops another dollar?

    at this rate ruth will r.i.p in less than a month

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