This Stock Could Make You Rich

History proves that, while low-priced businesses can make for good returns, reasonably priced great businesses can make you rich.

By "great businesses," I mean those that are growing fast in important industries. These are the millionaire makers, emerging multibaggers that dour analysts often overprice but which produce massive returns on invested capital. Some winners that you might recognize:

Company

Recent Price

5-Year Revenue Growth

ROC

5-Year Return

PotashCorp (NYSE: POT  )

$81.79

29.5%

35.4%

510.8%

Research In Motion (Nasdaq: RIMM  )

$43.25

82.3%

36.1%

169.9%

Sasol (NYSE: SSL  )

$27.75

20.8%

24.4%

112.2%

Sources: Motley Fool CAPS, Yahoo! Finance.

Outsized growth is what made investors in these stocks rich. These stocks were worth paying for, as the best almost always are -- high P/E multiples be damned.

We've always placed far too much faith in the shorthand of multiples. We don't recognize that a stock trading for more than 100 times earnings can be cheap, as Guess? (NYSE: GES  ) was in 2004, before it doubled. And we forget that Clean Harbors (NYSE: CLH  ) , one of the 10 best stocks of the past decade, traded for more than 160 times normalized earnings in 1999 and 60 times earnings the next year.

History proves that multiples aren't as important as we tend to believe. Of the more than 300 stocks listed on major U.S. exchanges that recorded a positive return last year, 53 entered the year trading for more than 30 times earnings, including McDonald's (NYSE: MCD  ) .

What's more, Foolish co-founder David Gardner frequently selects great businesses at reasonable prices for our Motley Fool Rule Breakers service and for his Motley Fool CAPS portfolio. CAPS is a community of 130,000 stock pickers; David's picks rank him in the top 2% of investors there.

Hunting for the next millionaire-maker
So, if paying up for growth works, why not do it more often? I suppose because doing so poses risks. Overpriced growers can fall faster than their (ahem) "cheaper" peers. Plus, betting on growth alone is dangerous -- any company can enjoy a short burst of unexpected success.

We want to pay up for businesses that are positioned for long-term growth. Companies that (a) already have a history of high growth, (b) are expected to maintain that pace for at least the next two years, and (c) produce above-average returns on capital.

So, I ran a screen at Capital IQ that returned 73 potential winners. My favorite of the list is Motley Fool Stock Advisor recommendation Amazon.com (Nasdaq: AMZN  ) , which has a big following in our CAPS community:

Metric

Amazon

CAPS stars (5 max)

**

Total ratings

3,709

Percent Bulls

72.9%

Percent Bears

27.1%

Bullish pitches

448 of 722

Note: Data as of March 31, 2009.

That's not an easy call. Last week, the e-tailer told investors that it would close three of its distribution centers, likely costing about 210 employees their jobs. Shortly after, a Goldman Sachs analyst removed the stock from the firm's "Conviction Buy" list, citing price weakness over the past year.

I can see that being a concern if you're a trader. But should Fools care? One CAPS investor, normalhaha, says recent price weakness has created an opportunity. Quoting:

Best online retailer hands down. Where are people going to shop when the malls are closing, the gas is spiking, and they get old and feeble and don't want to go outside (due to this global warming thingy)? They're going to shop online and everyone knows about Amazon.

Agreed; Amazon held up better than most over the holiday shopping season. Mix in a burgeoning cloud-computing business, and you'll understand why Amazon was my pick for the best stock for 2009. I'm sticking with my choice.

What about you? Would you buy Amazon at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate.

See you back here in two weeks with another potential millionaire-maker. Fool on!

Fool contributor Tim Beyers also contributes to the market-beating Rule Breakers service. Amazon is a Stock Advisor selection. Both the Income Investor and the Global Gains newsletter services have recommended Sasol.

Tim didn't own shares in any of the companies mentioned in this article at the time of publication. Check out his portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy has been living richly for the past 15 years.


Read/Post Comments (2) | Recommend This Article (11)

Comments from our Foolish Readers

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 March 31, 2009, at 5:45 PM, imalost wrote:

    What a joke that your still pumping Amazon. Yes its a e-tailer that cheats by giveing them unfair advantage by not charging sales tax when everyone else does. You guys are funny were in the article do you tell the reader that we are in a recession and the metrics for an e-tailer is a joke. Let see, selling at a PE of 50, PEG of over two and 11 times book. They are two to four more times expensive than GOOG, APPL, WMT and E-bay. What a disservice to the reader here. Amazon will sport zero to negative growth in 2009. Are you telling your readers to pay 50 times earnings for negative growth. What a disservice to the reader not properly informing their readers that the valuation for this retailer at at nosebleed levels and any minor blip will destroy this stock since its price for perfection. Amazon is a hype stock that is highly manipulated as eveidenced by the skewed PR. When this bubble burst it won't be pretty. They sell for 3 times the PE of the average S$P stock for what $1.48 in earnings if your lucky. Kindle is facing stiff competition and how many people are going to buy a book reader in a recession for $359 dollars? No mater how much you try to hype and pump this stock it will come crashing down to reality.

  • Report this Comment On March 31, 2009, at 5:56 PM, imalost wrote:

    To buy Amazon at this valuation you have to be mentally insane. After a 100% run up since November and at metrics that rival those of the tech bubble days, one would have to be mentally incapacitated to buy at this level. We are in a deep recession and paying 50 times earnings for negative growth in 2009 and so many unresolved issues. You mean to tell me there is no other reasonable priced stock out there that you would want to buy a stock that is all hype and pump. At this price is there is any mistep or analyst and others start analyzing this company truthfully the crash will be painfull. So much more downside than upside. Do you really think that Amazon should sell at a PE of 60,70, or 80 when their PE growth in 2009, before revisions, is a negative 2%.? The hype is almost defeaning at this point which tells you to be careful.

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