3 Growth Stocks for 2014

In the next 600 words, I will reveal three growth stocks that I expect to outperform the market -- both in 2014 and for the next several years.

But before I divulge the names and tickers, I would first like to reveal the magic formula. My crystal ball is based upon the following three reasons why I expect these stocks to outperform:

1) Operational Performance -- When we invest, we are buying a stake in a business, so we want to find businesses that are performing very well. Develop a list of meaningful operational metrics that are relevant to the particular industry, and then look for companies that are killing it where it really counts. This means putting less emphasis on the current P/E ratio, and more on metrics that evaluate business performance.

2) Smart and Visionary Management -- Growth companies are still...growing. This makes them much more sensitive to managerial decisions -- whether good or bad. Look for leaders who are committed to the long-term success of the company. I like CEOs who are either co-founders or have a significant ownership stake (preferably both).

3) Huge Market Potential -- Small companies don't always do so well in price wars. Find industries large enough to support a new player. I look for the company's total annual revenue to be a very small slice of the overall industry.

With those guiding principles in place, here are my three prognostications:

1) SolarCity (NASDAQ: SCTY  ) is the United States' largest provider of residential solar power systems, and it is growing very quickly. The company's customer base increased 133% year over year, and it expects to double its total installed capacity during 2014. Brothers Lyndon and Peter Rive are co-founders, and they remain CEO and COO (respectively). Elon Musk -- cousin of the Rive brothers -- sits as Chairman, and owns 25% of the company. SolarCity did $142 million of total revenue during the past twelve months, which is but a rounding error compared to the $370 billion of annual retail electric sales in the U.S. For SolarCity, the sky truly is the limit.

2) Zillow (NASDAQ: Z  ) operates a real estate information marketplace which lists over 1 million homes for sale or rent. The company collects revenue from 44,000 Premier agents -- who are glad to pay up to connect with a massive number of buyers and sellers. Zillow now attracts 64 million unique visitors per month, which increased 69% year over year. CEO Spencer Rascoff has been around since the company's founding in 2005, and he previously served as both CFO and COO. Zillow locked in $174 million of revenue during the past twelve months, which is but a fraction of the $10 billion that real estate agents spend annually on advertising. That sounds like an undervalued property to me.

3) MercadoLibre (NASDAQ: MELI  ) is often called "the eBay of Latin America," operating e-commerce sites for 13 countries. The company is certainly attracting users. Total revenue grew 45%, merchandising volume grew 49%, and payments volume grew 55%, year over year and in local currencies. Marcos Galperin co-founded MercadoLibre in 1999 and remains CEO and Chairman. The company also has a tailwind at its back. The number of unique Internet users in Latin America is increasing 13% per year -- which is the fastest growth rate of any continent worldwide. The auction on MercadoLibre is just getting started.

The bottom line is that great businesses produce great results. SolarCity, Zillow, and MercadoLibre all have smart managers leading them into some of the largest opportunities in the business world. Strong operational results have followed, and I expect their success to continue into the future.

At the Motley Fool, we look for companies that use technology, business model, or culture as an innovative weapon -- we call them Rule Breakers. All three of the companies mentioned above are active recommendations of our Rule Breakers service. To get additional recommendations, find out more about our process, or even start a risk-free 30 day trial, click here.


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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 December 30, 2013, at 2:02 PM, Decoy0527 wrote:

    Simon, I don't disagree with your selections, but profits do matter and you have nary a word about them. Have to be careful of companies that have double digit revenue growth but can't seem to earn a bottom line GAAP profit. Elon Musk may prove to be a genius, but right now he is better at growth (Solar City and Tesla) than profits.

  • Report this Comment On January 03, 2014, at 3:20 AM, TurbulentTime wrote:

    Hi Simon, we both own shares of SolarCity. I also own shares of Tesla Motors. For those who emphasize on current existing profitability, look elsewhere. If you cannot stomach growth in the expense of short-term lack of profitability, then you are those who have never liked Amazon also. We need huge scale of businesses in the future, businesses that will be new leaders in their industries. Starting up a new business, and expanding its infrastructure need capital. Once the expanded infrastructure will be in place, lesser and lesser amount of percentage of capital will be needed for expansion, and economic of scale, lowered per unit cost will enable such businesses strive for many more decades and centuries.

    The existing companies in the same industries are usually slow to react, they say a lot but never can quite compete with the new leader since the new leader has first-mover advantage, plus they are willing to sacrifice short-term profitability in exchange for long-term domination in the industry.

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