5 Undiscovered Growth Stocks

For all of the talk over why you should never overpay for a stock, the plain truth is that most of the 10 best stocks of the past decade were expensive in 1997. That's why I think you should always supplement a portfolio of cheap tortoises with some high-octane hares.

And now may be a great time to go shopping. Evidence says a growth-stock rally is under way right now.

Running with the rebels
Color me unsurprised. All-star investors buy growth stocks because, over the long term, they're also the best value stocks. Still, high growth, by itself, isn't enough. Otherwise, there would have been no dot-com bubble.

That's why David Gardner and his team of analysts at Motley Fool Rule Breakers also seek first movers in important industries. Most often, that leads the team to stocks like screen maker Universal Display (Nasdaq: PANL  ) , which wasn't widely known when it was picked but is currently a double-digit market-beater.

A history of winners
Yet buying early isn't a new strategy. Growth-investing pioneer Thomas Rowe Price -- better known by the firm that bears his name, T. Rowe Price -- would frequently invest in lesser-known names in what he called "fertile fields of growth." So enamored was he by this strategy that, in the early 1960s, he invented the New Horizons fund, which today still seeks small caps operating in fertile fields. (And it's still a market-beater.)

You, too, can enjoy market-beating returns with a little extra work. And when I say a little, I mean a little, thanks to our 100% free Motley Fool CAPS investor-intelligence database, which contains information on more than 3,900 stocks.

CAPS applies user input to rate stocks from one to five stars. So, using CAPS, we're going to search for stocks that haven't yet met the threshold for a star rating, that have a minimum $250 million market cap, and that are expected to grow their earnings by at least 20% annually over each of the next five years.

Let's have the list!
Now, with that preamble behind us, here are five growth stocks that have yet to be discovered:

Company

No.
of CAPS
Ratings

Bullish
CAPS
Ratings

5-Year
Growth
Estimate

CoStar Group (Nasdaq: CSGP  )

7

3

30.0%

iBasis (Nasdaq: IBAS  )

5

4

58.0%

MedCath (Nasdaq: MDTH  )

10

6

20.0%

Pericom Semiconductor (Nasdaq: PSEM  )

9

8

25.0%

TDK (NYSE: TDK  )

6

6

20.4%

Sources: Motley Fool CAPS, Yahoo! Finance.

Bear in mind that this isn't a list of recommendations. Instead, I offer these stocks as candidates for further research. But it's TDK, which sells a share of earnings for less than its long-term growth rate, that interests me most. All-star CAPS investor cjlee001 explains the thesis:

"TDK has decided to side with the Blu-ray disc over the HD-DVD. They've developed the Durabis coating to help the thin/fragile Blu-ray disc. Performance will depend largely on the success of the Blu-ray disc. But I think Blu-ray should win over HD-DVD in the long run, once costs are reduced."

Intrigued? Do your own due diligence, and then check in with thousands of other investors at CAPS. And, if you'd like, add your own commentary. You'll be helping your fellow Fools and testing your ideas at the same time. Click here to get started now; it's 100% free to participate.

See you back here next week for five more undiscovered growth stocks.

Fool contributor Tim Beyers, who is ranked 2,237 out of more than 23,200 in CAPS, is a sucker for growth stocks and a regular contributor to Rule Breakers. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. All of his portfolio holdings can be found at Tim's Fool profile. His thoughts on growth stocks, Foolishness, and investing in general may be found in his blog. The Motley Fool's disclosure policy is a Fool's greatest discovery.


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