The search for the next ultimate growth stock sometimes takes us down long, strange, windy roads. Other times it's as straightforward as Mom and apple pie. Today we're going down the latter path, sticking with the basics to cover what many consider to be the screen for finding Rule Breaking stocks: sales growth.
Obviously, I'm not talking about plain-vanilla sales growth. I'm talking about outrageous sales growth -- the kind of growth that boasts a deep voice and pumps iron at Muscle Beach.
Get big -- fast!
Rule Breaking businesses, you see, tend to grow really fast when their convention-busting products hit the market. Think of Apple and the iPod. Or Pixar (Nasdaq: PIXR ) and its spectacularly successful films, which have all but redefined what we expect from animated stories. Each has seen massive revenue growth and, as a result, has provided investors with spectacular stock market returns.
So when our team of analysts embarks on the search for new Rule Breakers, we usually start with companies that have generated in excess of 100% average sales growth over the past three years. There are several tools that will help you reveal candidates that meet this criterion. Here at Fool HQ we tend to use Capital IQ, a highly useful product that allows you to screen for almost anything. (Seriously, we've tried.)
Capital IQ found 59 firms that met our criteria this go-round. Some were frighteningly high, such as Endeavour (AMEX: END ) at -- wait for it -- 5,046.6%. Others barely made the cut, such as Qiao Xing Universal Telephone (Nasdaq: XING ) , with 100.5%. But three really stood out:
1. Evergreen Solar (Nasdaq: ESLR )
Three-year-revenue compound annual growth rate (CAGR): 112.0%
We first dug into Evergreen Solar, which makes solar cells, panels, and systems, in January. And for good reason: Solar industry tracker Solarbuzz says the market has grown 25% annually over the past 15 years. It also says that the total market for solar power systems reached $6.5 billion in 2004 and will grow another 23% annually to $18.5 billion by 2010. Evergreen's own revenue growth bears witness to the idea that this is a burgeoning market.
There are problems with Evergreen, of course. For example, trailing-12-month free cash flow has run negative -- to the tune of nearly $20 million. That may have led the firm to take on $90 million in debt to boost liquidity. Insiders, too, have been selling throughout the summer.
Still, there's no escaping the fact that Evergreen is one of the best-funded competitors in an increasingly relevant space. Yet its total 2004 revenue accounted for less than 1% of the total market, if you follow Solarbuzz's numbers. That looks like opportunity -- if Evergreen Solar can remain solvent. Investors appear to believe it's a chance to worth taking.
2. NetEase (Nasdaq: NTES )
Three-year-revenue CAGR: 150.9%
Let me begin with an admission: I'm not a gamer. But I'm seriously interested in anything that has people so enthralled that they're willing to risk their lives. NetEase, which produces some of China's more popular online games, is in exactly that kind of market. Indeed, Chinese researcher Evolution Securities says that the sector appears poised to grow at 42% annually over the next three years and that unit prices will increase during that time.
If true, that would be spectacularly good news for NetEase and fellow Motley Fool Rule Breakers pick ShandaInteractive (Nasdaq: SNDA ) . Even if those estimates are aggressive, NetEase is still likely to grow no slower than the sector. Now consider that the stock trades for a forward price-to-earnings (P/E) ratio of just 19, and it's no wonder the shares are already up more than 55% since being added to the Rule Breakers roster in January.
3. Overstock.com (Nasdaq: OSTK )
Three-year-revenue CAGR: 134.9%
Oh, boy. Overstock and controversy. Controversy and Overstock. Yet when you get past the screaming headlines and outrageous proclamations, there's a lot to this business. Otherwise, the "Big O" wouldn't be growing so darn fast. (Though profitability remains in question.)
I'll let better-versed Fools take you inside the pros and cons of Overstock, but I think it's important to note that CEO Patrick Byrne is at least putting his money where his mouth is. Whether or not you think he's nuts, that's an important statement, and it's one of the reasons the stock remains in the Rule Breakers portfolio.
Just the beginning
There are innumerable ways to scan the markets for ultimate growth stocks. I hope what's been laid bare here gives you a bit of a head start, should you choose to take on the work for yourself.
Fool co-founder David Gardner has said that the businesses breaking the rules are those that are altering the economics of their industries. Most "Faker Breakers" will claim as much in a bevy of press releases, but the companies to watch out for will prove their worth through massive revenue growth. If you're seeking multibagger returns for your portfolio, find those companies first.
And then don't look back.
Get the latest Rule Breaking Foolishness with these tidbits:
- In 1492, Columbus sailed the ocean blue. And became a Rule Breaker.
- Why, oh why, do we keep losing our naked shorts?
- Get 'em young. Check out the latest Baby Breaker Birth Announcements.
- Would you go "all in" with your portfolio? A Rule Breaker would.
Biotech. Nanotech. Info tech. Any tech. David Gardner and his merry band of Foolish analysts cover them all inMotley Fool Rule Breakers. So far, their picks are beating the market by more than 5 percentage points as of this writing. Get in on the action -- and catch up on the buy reports of all 26 official recommendations -- by taking a risk-free 30-day trial today. All you have to lose is the prospect of better returns.
Fool contributor Tim Beyers only breaks the rules in his portfolio. Wimp. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Fool profile, which is here. Marvel and Pixar are Motley Fool Stock Advisor recommendations. The Motley Fool has an ironclad disclosure policy.