Earn Life-Changing Returns

Two guys and a garage
Stop me if you've heard this story before. Two guys have a big idea. So big, in fact, that they decide to start a company in a garage. Years pass. The two buddies move out of the garage into some Silicon Valley skunkworks facility. Not long after, a real corporate headquarters opens. And not long after that, there's a stock offering. Decades later, of course, the two guys are filthy-rich billionaires.

Who is it I'm talking about? Microsoft's Bill Gates and Paul Allen? Apple's Steve Wozniak and Steve Jobs? Yahoo!'s Jerry Yang and David Filo?

How about none of the above?

Rebels with a cause
The original two-guys-and-a-garage story goes to Dave Packard and Bill Hewlett, who started Hewlett-Packard (NYSE: HPQ  ) in 1939 with $538 and little else. But then the pair improved the audio oscillator so that it could be used for, among other things, making movies.

Walt Disney was instantly hooked. HP built eight oscillators for the House of Mouse, all of which were used in the filming of the Disney classic Fantasia. Dave and Bill, meanwhile, earned a patent for their efforts. It would be the first of many over the course of the firm's illustrious history, writes Howard Rothman in his book 50 Companies That Changed the World.

As the firm grew, Dave and Bill did more than pioneering engineering work. They also introduced a groundbreaking management style called "management by walking around," which helped to foster an open and egalitarian culture built on innovation.

Certainly, that culture has taken its share of bruises in recent years. But HP has returned 10% per year since its 1957 IPO -- excluding dividends. Add in dividends, and a $10,000 investment made back then would be worth some $2.5 million today.

Lessons from a leader
So, what lessons can we draw from Bill and Dave? Well, first, that it's possible to earn life-changing returns by investing in stocks. And second, we can use their company as a model for finding the great growth stocks of today. Here's a list of the key attributes of the early HP:

1. A defensible, industry-changing idea. The oscillator helped to transform an industry, which led to patents and further breakthroughs. It also helped spark a culture of innovation at HP. Hired engineers saw what was possible thanks to Bill and Dave and sought to replicate it.

2. Superior management. Though today the "HP Way" isn't what it once was, for decades it helped to codify a set of principles that led to years of double-digit sales growth -- often more than 20% annually, writes Rothman.

3. Excellent use of capital. Research and development was a key part of the business Bill and Dave built. As a result, HP was largely self-funded through its early years; cash earned from existing inventions was plowed back into the business to create further breakthroughs.

Earn life-changing returns
Hundreds of innovators have gone public over the past three years, and many of them have ultimate growth stock potential. Consider these debt-free firms, whose flair for the innovative has led to outrageous sales growth over the trailing 12 months. Insiders are also significant shareholders.

Company

Insider Ownership

One-Year Sales Growth (TTM)

IPO date

Return Since IPO

optionsXpress (Nasdaq: OXPS  )

31%

55%

1/27/05

35%

CoTherix (Nasdaq: CTRX  )

32%

1,016%

10/15/04

12%

Google (Nasdaq: GOOG  )

29%

78%

8/19/04

381%

iRobot (Nasdaq: IRBT  )

57%

57%

11/9/05

(25%)

The9 (Nasdaq: NCTY  )

56%

922%

12/15/04

22%

Nextest Systems (Nasdaq: NEXT  )

42%

81%

3/22/06

(25%)

Source: Capital IQ, a division of Standard & Poor's.

The best part of this chart is the total returns, or lack thereof. Despite heavy sales gains, strong balance sheets, and engaged insiders, most of these firms (Google being the exception, of course) appear to have plenty of room to run.

One of them, Roomba creator iRobot, is a pick of our ultimate growth investing service, Motley Fool Rule Breakers. Why? We believe that investing in well-managed, innovative firms like iRobot can take your portfolio from the garage to the grandstand. Click here to find out what other growth stocks we like now.

Fool contributor Tim Beyers only breaks the rules in his portfolio. Wimp. Tim didn't own shares in any of the companies or funds mentioned in this story at the time of publication. Get the skinny on all of the stocks in Tim's portfolio by checking his Fool profile. Yahoo! is a Stock Advisor recommendation. Microsoft is an Inside Value pick. The Motley Fool's disclosure policy is a rebel on Wall Street.


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