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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.
3-Year EPS Growth Rate
|Neutral Tandem (Nasdaq: TNDM )||82%||12.8||*****|
|lululemon athletica (Nasdaq: LULU )||54%||37.7||*|
|Medifast (NYSE: MED )||48%||20.3||**|
|Cree (Nasdaq: CREE )||34%||25.5||***|
|Allscripts Healthcare Solutions (Nasdaq: MDRX )||15%||29||****|
Source: Yahoo! Finance, Capital IQ, a Standard and Poor's company, and CAPS as of Oct. 28.
Growth without good looks
You might expect that a business focusing on premium-priced, yoga-inspired athletic apparel would take a severe beating during a major global recession. But if the name of that company is lululemon athletica, you'd be dead wrong. lululemon grew right through the recession and has actually seen growth accelerate lately. When the company announced its fiscal-second-quarter earnings last month, revenue was up an impressive 56% and net income jumped 137%.
Even though healthy results from both Under Armour (NYSE: UA ) and Nike suggest consumers are still in the market for upscale athletic gear, CAPS members aren't so sure that future growth at lululemon will justify the stock's big earnings multiple.
Diet expert Medifast has only two CAPS stars, but much of the recent CAPS chatter on the stock has been pretty bullish. That may not be too surprising considering Forbes just named it the top small company in America. Over the summer, my fellow Fool Rick Steier focused in on Medifast as well, suggesting that it has what it takes to outpace competitors Weight Watchers and NutriSystem (Nasdaq: NTRI ) .
Finally, LED specialist Cree has sure been lighting it up on the growth front, but some CAPS members are concerned that the stock's valuation already includes much of the company's potential future growth. The three-star rating is better than that of both lululemon and Medifast, but it basically says "Why not just stay on the sidelines for now?"
Strutting their stuff
While the stocks above haven't been able to sufficiently inspire CAPS members, Allscripts has.
The CAPS rallying cry for Allscripts is really pretty simple. Health-care costs are high and continuing to spiral out of control. Allscripts provides a range of software solutions that help health-care providers not only do their jobs better, but do them more efficiently. If we have any hope of bringing medical costs under control, solutions from companies like Allscripts will likely play a part.
Allscripts shares are hardly cheap on the basis of most valuation multiples, but CAPS members seem to think the company's heady growth will justify today's price.
But while CAPS members are pretty fond of Allscripts, it just didn't have what it takes to top this week's top growth stock, Neutral Tandem.
A good question might be how it is that Neutral Tandem tops our growth list and yet also has the lowest P/E multiple. The company's three-quarter streak of missing earnings estimates probably has a lot to do with that, along with the fact that current expectations have Neutral Tandem's earnings per share down 16% for 2010.
It may be that the 2010 dip is a mere hiccup for the company, though, as analysts see earnings per share bouncing back 24% in 2011 and showing annual growth of around 17% over the next five years. If we're to believe that, then the stock's current valuation could be a steal.
I consider TNDM to be a low-cost provider within their current business which should allow them to cut prices in order to retain market share. The current margins allow room for price competition in order to retain market share and grow their moat provided by the size of their network. In addition, any threats from technological obsolescence should be largely mitigated by the Ethernet Exchange offering that will likely become the growth engine of TNDM's future earnings. ... This is the kind of investment opportunity I like to "back the truck up" on.
Now go vote!
Do you think that Neutral Tandem has what it takes to be America's next top growth stock? Head over to CAPS and let the rest of the community know what you think.
Looking for even more growth? My fellow Fools have identified a stock that they think will benefit from the "new technology revolution." Find out what that stock is by clicking here and entering your email address.