Let the Rally Begin

Is growth back? It sure seems like it. Deep-pocketed suitors are proposing to fast-growing firms almost daily. Microsoft (Nasdaq: MSFT  ) , for example, last week bid $6 billion for Web advertising wonder aQuantive (Nasdaq: AQNT  ) . The deal hands Motley Fool Rule Breakers subscribers a 150% gain in just five months.

More could be on the way. A survey of leading investment managers conducted by the Russell Investment Group says the growth rally will continue through the remainder of the year. And relatively new Fidelity Magellan (FMAGX) manager Harry Lange says growth isn't just good, it's cheap. "I am still convinced that this is the place to be and if anything ... I have been adding even more to growth stocks," Lange told Reuters.

Don't dump the downtrodden
Surely, Lange's optimism draws from years of success with growth stocks as manager of Fidelity Capital Appreciation (FDCAX), which thumped the market during both the go-go years of the bubble and the ugly aftermath that ensued. But there's also more to it than that. History, for one.

Growth stocks did better than value for the six years between 1994 and 2000, as technology stocks soared. Value stocks have been on a roll since. Now, as earnings growth begins to show signs of slowing, fast movers unaffected by general economic malaise could return to prominence. That's why, when Lange took the helm of the Magellan fund, he dumped Pfizer (NYSE: PFE  ) and bought Google.

Funding growth
Then there's small growth go-getter Vanguard Explorer (VEXPX), which trailed the market by six percentage points in 2006. This year, Explorer's managers are betting on speedsters like education financier First Marblehead (NYSE: FMD  ) , nursing care provider Manor Care (NYSE: HCR  ) , and pawnshop operator Cash America (NYSE: CSH  ) to return their go-go style to the podium. (These firms are expected by Street analysts to expand earnings by more than 15% annually over the next five years.)

Be a rebel with a cause
Here at Fool HQ, we've begun to see the turn as well. Last summer, David Gardner's Rule Breakers portfolio was bleeding red. And the quest for the next Starbucks was stuck in the mud. No longer. Today, the portfolio is once again beating the market and features seven stocks that have at least doubled.

How did it turn around? My analysis points to three traits shared by our biggest winners:

  1. A competitive advantage in an important, emerging market.
  2. A sustainable business growing at an above-average pace.
  3. Top-flight managers with a clear vision for what they wish to accomplish.

As you seek the sort of multibagger returns that helped growth gurus like Peter Lynch and Philip Fisher make millions from thousands, remember these factors. And, in the meantime, if you're looking for ideas for how to take advantage of the current growth stock rally, click here to get 30 days of free access to Rule Breakers. We'll show you everything we're buying now.

This article was originally published on November 14, 2006. It has been updated.

Fool contributor Tim Beyers owned shares of aQuantive at the time of publication. Microsoft and Pfizer are Motley Fool Inside Value recommendations. Fidelity Capital Appreciation and Vanguard Explorer are Champion Funds selections. aQuantive is a Rule Breakers pick. First Marblehead is a Hidden Gems recommendation. The Motley Fool's disclosure policy is a rebel with a cause.


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