What's the Point of Growth?

You might think companies are like sharks: They must keep moving to keep from dying. Perhaps that's the reason so many investors seek growth, having been inculcated to believe that if it ain't growing, then it must be dying. Of course, investors have also been regaled by great wealth derived from little companies that grew in a big way into big companies, a la Microsoft (Nasdaq: MSFT  ) and Cisco Systems (Nasdaq: CSCO  ) .

Not-always-great growth
But for every Microsoft and Cisco Systems, one can unearth a netherworld sardine-packed with the likes of Webvan, Savin Computers, and Pets.com.

Still, many companies do gain traction and grow -- at least, they grow the top line, which makes you wonder: Are exceptional top-line growers worthwhile investments? To which I answer: It depends. If the growth fails to produce bottom-line growth, then what's the point? Take the media sector, for example. Its growth has frustrated many investors over the years: The faster revenues have grown, the worse the shares have generally performed.  

I'm uninterested in growth for growth's sake. I'm more interested in efficiency and effectiveness. If the company can grow the top line, great, as long as it can grow the bottom line at an equal or quicker pace. Anything else is simply empire-building.  

Five for the road ... literally
Not everyone agrees. The following five companies have been exceptional top-line growers, though they have yet to follow through to achieve exceptional bottom-line results. Despite that fact, their shares have performed remarkably well this year, which I think presents a selling opportunity.  

Valassis Communications (NYSE: VCI  ) , a media and marketing services company, has been blindingly remunerative for investors in 2009. Valassis's share price has increased nearly 20-fold from the depths of the financial crisis earlier this year. Valassis has been an enviable revenue grower, more than doubling the top line over the past five reporting years to $2.38 billion in 2008, but net income has hardly kept pace. In fact, the trend in net income has been mostly down; 2003 was the high-water mark at $104 million, compared to a $207 million loss in 2008.

Bon-Ton Stores (Nasdaq: BON  ) , a regional department-store chain spread across the Northeast and Midwest, has been another stout performer, having recovered eightfold this year to its current price of $8.50 a share. Bon-Ton has a history of marking up the top line: Revenue has tripled over the past five fiscal years to $3.23 billion, but net income continues to lag behind like a recalcitrant child, thanks to contracting net margins burdened by a five-fold increase in long-term debt.

Coinstar's (Nasdaq: CSTR  ) offerings include self-service coin counting, electronic payment services such as stored value cards, and Redbox DVD kiosks. It's also offered shareholders an exceptional return on their investment, thanks to its share price more than doubling from 52-week lows. Coinstar's revenues have increased fivefold from 2003 to 2008's $912 million. But it's the same story: Net income has failed to maintain pace, which should come as no surprise when you consider that operating margins have contracted every year over the same period.

WCA Waste, a vertically integrated solid-waste company, should probably be given a pass, given its status as a relatively new small fry -- but I won't. WCA's revenues have more than tripled in the past five years to 2008's $208 million. Over the same period, the company has either operated at a loss, or with net income hovering between $2.5 million and $3 million. That said, its share price has more than doubled from 2009's lows, even though it continues to post losses.

JetBlue Airways (Nasdaq: JBLU  ) proves you can lose money whether you're big or small. In 2000, it lost $21.3 million on $105 million in sales. In 2008, it lost $76 million on $3.39 billion in sales. Though it has grown revenue every year over that period, net income has been as erratic as an airline's time tables. Management performance has been less erratic in its inability to generate returns on its expanding asset base. But that fact hasn't stopped JetBlue's shares from doubling from March's lows.
One could argue that these companies are simply in their hurry-up-and-grow mode, and that they'll clean house once growth subsides. That could be the case, but their histories suggest otherwise, which is why I think investors should consider taking some of this year's windfall off the table or revisiting these stocks once they've proven they can better manage their growth.