America's Next Top Growth Stock

Growth stocks are the beauties of the stock world, plain and simple. They're exciting, they have good stories, and they can make you a lot of money.

But for all their beauty, growth stocks are also the prima donnas of the market. They can be erratic, they don't always live up to their billing, and they tend to attract a shareholder base that's ready and willing to run at the first signs of slowdown. For those reasons, caution is certainly in order when you enter the world of growth investing.

Fortunately, The Motley Fool's CAPS service brings us the collective intelligence of a community of more than 170,000 investors and is a great resource for separating the Jessica Albas from the Jabba the Hutts. Each of the stocks competing for this week's top spot has a market cap of at least $100 million and grew its earnings per share by an average of 15% or more per year over the past three years. So let's go ahead and meet our contestants.

Company

3-Year EPS Growth Rate

Price-to-Earnings Ratio

CAPS Rating
(out of 5)

Baidu (Nasdaq: BIDU  )

57%

90.7

**

STEC (Nasdaq: STEC  )

56%

13.9

***

Cameco (NYSE: CCJ  )

44%

18.1

*****

Netflix (Nasdaq: NFLX  )

33%

58.2

**

Cellcom Israel (NYSE: CEL  )

17%

9.2

****

Source: Yahoo! Finance, Capital IQ (a Standard and Poor's company) and CAPS as of Sept. 15.

Growth without good looks
Despite scorching growth, Baidu can't seem to catch a break on CAPS and score an upper-tier rating. Why? It's very simple: valuation. Investors are currently paying a huge price for Baidu and many CAPS members are concerned that it's simply too high -- blazing growth or not.

Not everyone is rushing to give the thumbs-down on Baidu, though. Fellow Fool Tim Beyers thinks the growth does justify the price, while Fool Tim Hanson -- though he thinks the stock is likely overvalued -- is worried that short-sellers could get slammed.

Meanwhile, in movie world, Netflix is waging war on the cutting edge of entertainment. The company that pioneered delivering movies through the mail is now trying to become the name in online movie streaming. But it's not going to be easy to keep the lead.

Netflix may now be streaming on Apple (Nasdaq: AAPL  ) iPhones and iPads, but Apple already sells digital movies on iTunes and I wouldn't count out Jobs & Co. when it comes to a huge market like this. But Apple is hardly the only potential source of competition, as Amazon has its own on-demand offering and small-but-dangerous players like Hulu could angle their way in as well.

Of course, competition may not even be investors' biggest concern right now. Like Baidu, Netflix's stock carries a hefty valuation -- even when you look at it on a more attractive cash-flow basis. As a result, many cynical CAPS members have repeated a simple, one-word mantra: "overpriced."

I'm very much on board with STEC's uninspiring three-star rating. I can't say that I feel overly bearish about STEC, particularly considering its low valuation. However, I'm not excited about the stock, either. The company dukes it out in the cyclical, highly competitive, largely commoditized memory industry where it has to line up against tough competitors like SanDisk (Nasdaq: SNDK  ) .

In other words, I'm not pounding the table to short STEC, but I'm not lining up to invest either.

Strutting their stuff
While the stocks above haven't been able to sufficiently inspire CAPS members, Motley Fool Global Gains pick Cellcom Israel has.

It doesn't take an equity-market super-sleuth to figure out why CAPS members might like Cellcom. The company has been steadily growing, it has a single-digit price-to-earnings ratio, and it's paying a mouth-watering, double-digit dividend.

But if that's all so easy to see, why is the stock down since earlier this year? To start with, there are concerns about where new growth comes from as Israel already has one of the highest mobile-phone penetration rates in the world.

What's more worrisome, though, is the recent decision by Israel's communications minister to cut the amount carriers can charge each other to connect calls by a whopping 80%. Cellcom said simply that the cuts would have "material adverse effect on the company's results."

So why stick around? It looks like Mr. Market may have overdone it on the downside. The fee cuts will hurt, but they certainly won't imperil the company. The dividend may need to be cut, but it will still likely be on the hefty side.

But while Cellcom Israel may have piqued CAPS members' interest, it couldn't quite top uranium kingpin Cameco for this week's top spot.

Cameco lives at the intersection of a number of trends that have been attracting investors like iron fillings to a neodymium magnet. There's the fact that it harvests a physical commodity -- which can be a hedge to ailing paper currencies. There's the potential that China's growth will cause it to turn to nuclear power. And there's the push for "clean energy," which could bring a renewed interest in nuclear in other parts of the world, including the U.S.

Put these all together and it's no wonder why CAPS members think there could be opportunity in Cameco's shares.

Now go vote!
Do you think Cameco has what it takes to be America's next top growth stock? Head over to CAPS and let the rest of the 170,000-member community know what you think.

These high growers may be dangerous to short, but that doesn't mean that you should forget about shorting altogether.

Baidu is a Motley Fool Rule Breakers recommendation. Apple, Amazon.com, and Netflix are Motley Fool Stock Advisor picks. Cellcom Israel is a Motley Fool Global Gains choice. The Fool owns shares of and has written covered calls on Cameco. Try any of our Foolish newsletter services free for 30 days

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can check out the stocks he's keeping an eye on by visiting his CAPS portfolio, or you can connect with him on Twitter @KoppTheFool. The Fool's disclosure policy would surely win America's Next Top Disclosure Policy, but for some reason there's no such contest.


Read/Post Comments (4) | Recommend This Article (8)

Comments from our Foolish Readers

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  • Report this Comment On September 16, 2010, at 1:06 PM, jrmart wrote:

    STEC and SanDisk offer low cost flash drives and memory cards, so yes you can call them competitors in that world. Unfortunately by calling them competitors means you really don't fully understand the solid state memory marketplace. SanDisk supplies solid state drives for the Apple IPAD while STEC supplies enterprise solid state drives for cloud computing/enterprise storage. These are two totally different areas, but both have great potential to increase earnings. STEC has a better opportunity to earn more money over the long term because they offer PROPRIETARY enterprise storage devices in the 16 billion dollar cloud computing/enterprise storage area, while SanDisk supplies a drive to Apple that can easily be made by other competitors. After you introduce a solid state enterprise drive to the cloud computing/enterprise market, it could take up to 18 months to get that product approved. That is an area where STEC holds a 12 month to 18 month lead. While companies like Western Digital, Seagate and Hitachi try to get their first generation solid state drives approved for cloud computing/enterprise storage, STEC has already has tested and is now selling their 2nd generation products.

  • Report this Comment On September 17, 2010, at 5:05 PM, TMFKopp wrote:

    @jrmart

    I don't argue that STEC could be well positioned right now, but that doesn't mean that it will be able to keep that position. SSDs are going to be a huge market whether we're talking about consumer or enterprise and you better believe a lot of companies are going to be going after both markets.

    Now I'm not an IT professional, so you and others may be able to run circles around me when it comes to the technology of it all. However, what I do know is:

    1) Proprietary technologies often thrive in early stages of emerging areas, but as those areas become more developed, customers often begin to prefer more commoditized solutions that they can mix and match. I can see this being a particular concern when it comes to components in storage hardware. That is, customers might still prefer EMC's boxes, but EMC may like to have a bunch of other suppliers along with / other than STEC.

    2) The best technology does not always win. That's been one of my particular concerns when it comes to any emerging area. The strange, and potentially unfortunate, fact is that the company that produces the absolute best technology is not always the company that thrives. So even if you can pinpoint the company that has the speed or the security or the reliability that trumps everyone else's product (which can be a massively difficult task in itself), you still may find yourself riding a company that goes nowhere.

    Matt

  • Report this Comment On September 17, 2010, at 7:16 PM, jrmart wrote:

    Enterprise solid state drives are totally different from the solid state drives that are used in commodity products like the IPAD and IPHONE4. The integrity of the information stored in clouds and large enterprise data centers is crucial. You are right, anybody can build a solid state drive, but not everybody can deliver the combination of software and hardware that can maintain 100% integrity. That is the area where STEC really stands out. It takes close to 12 to 18 months after you deliver a enterprise solid state drive for testing before it can be approved. STEC already has sold over $200 million of their solid state ZEUS drives in this marketplace, while companies like Seagate, Western Digital and Hitachi are still working on their first generation solid state drives. In the meantime, STEC is already delivering their 2nd generation products. All of these products need to be managed and it is very difficult to manage different devices from different manufacturers. All of this doesn't guarantee STEC success, but STEC certainly has a giant lead on all the competitors.

  • Report this Comment On September 22, 2010, at 4:27 PM, flashfinancials wrote:

    The table showing the 3 yr EPS growth rate of STEC is misleading. Take a look at their first two quarters of 2010, and the projection for the remainder. The revenue and earnings growth will certainly be negative (they are actually showing a net LOSS so far for 2010).

    Seems like that should be taken into account before including them in a stock screen for growth stocks, they should not even be on this list. If their new product is successful, they may be candidates for a "turnaround" list.

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