Color to the Numbers: Top Hypergrowth Stocks

Thanks to the Internet and sites such as Yahoo! and MSN Money, investors have more tools than ever to search for stock ideas by running screens of stock databases. But screens often return numerous stocks that need to be weeded out because the numbers don't tell the whole story. Maybe the massive growth at one company was due to one-time tax adjustments and not core operations. Or maybe the screen didn't include the latest announcement that a dividend was canceled.

So just like the color-by-numbers books kids doodle on, the picture for stocks pulled from any screen isn't clear until the appropriate color is added to the page. In this edition of "Color to the Numbers," we'll enlist Motley Fool CAPS to take a Foolish look at a screen for hypergrowth stocks to see which stocks may be worth investigating further, and which should be cast aside.

Better a screen than a window
The community of knowledgeable investors who rate stocks in CAPS will help us in our search for hypergrowth stocks. By pulling up a quote on a particular stock in CAPS, investors can see at a glance how the collective community rates a company today. Additionally, investors can see how the very best All-Star stock pickers -- CAPS players with a ranking above 80 -- rate a given stock. There are even pitch commentary and blogs that give details behind bull and bear opinions. This gives investors much more qualitative resources than just numbers and tables.

So let's take a look at our hypergrowth screen for today and a handful of the top stock candidates it returned. To run this screen, we'll use the following criteria:

• Market cap of at least $100 million.
• Compound annual revenue growth rate of at least 20%.
• Compound annual EPS growth rate of at least 100%.
• Projected five year EPS growth rate of at least 20%.
• Net profit margins of at least 10% for the trailing 12 months.

This should give us the cream of the crop in terms of stocks that are already blazing a hot trail of revenue and earnings growth. We'll use analysts' projected growth rate to sift through those expected to continue this earnings streak for some time. The net profit minimum of 10% will also help us zero in on the most profitable of companies, not just those growing at the expense of profits. But not every company with a stellar growth record and high expectations makes a good investment. (Hint: This is where CAPS can really help.)

Opinions with the numbers
Here's a sampling from the list of stocks our screen pulled up today.

With such impressive growth rates from each of these companies, it's likely you've heard of at least a few of them in the financial media. Hypergrowth companies tend to get plenty of coverage, making them prone to a little "irrational exuberance" from time to time as well, so let's dig a little deeper than just the numbers here.

Property and casualty (P&C) insurance provider Tower Group tops out the screen with an amazing 281% growth rate -- higher even than search superstar Google. CAPS investors have only good things to say about Tower Group, as only one out of 142 investors think it will underperform the S&P going forward. While the P&C sector as a whole has been performing well lately, Tower Group's targeted acquisition and growth strategy has differentiated the company above the rest. CAPS investors cite a solid track record in delivering fundamentally sound growth over the last few years as reason to believe the outstanding performance will continue.

Several of our other hypergrowth stocks are bunched at the middle in three-star territory, including weight management product and services provider Nutrisystem. The diet company's huge growth in revenue and earnings sent the stock soaring in 2005-2006, but some CAPS investors are unsure if the company can stick to this high-growth plan. While a few investors lament that the food product shipped to customers ranks with the flavor of cardboard (is processed diet food supposed to taste yummy?), others are concerned about the ability to attract and retain customers. But bulls see a large market of overweight consumers and a more reasonable P/E of 24 because of a pullback in the stock recently, as reasons to believe the company will outperform the market in the months and years ahead.

There is a lowly one-star stock lurking at the bottom of CAPS investors' growth pool, however -- that of online travel wheeler and dealer Travelzoo. The valuation of the stock for a business model that is vulnerable to competition is enough reason for many investors to sit on the bear sideline of Travelzoo. In fact, more than half the CAPS All-Stars voting on the company give it the thumbs-down.

Let 31,000 rated investors be the judge
The collective wisdom of a huge pool of investors can quickly add color to a whitewashed page of numbers. But even with an entire community of qualified opinions acting as the judge, individual investors are still the jury and should perform their own research.

Want to see your favorite screen results run through the wringer in the CAPS community? It's free to tap the knowledge base and even give your own opinion in Motley Fool CAPS.

Helping investors find the ultimate growth stocks is the charter of the Motley Fool Rule Breakers newsletter. To see what stocks David Gardner gives the thumbs up, check out a free 30-day trial.

Fool contributor Dave Mock does his best to color within the lines, but he reserves his right to artistic expression. He owns no shares of companies mentioned here. Dave is the author of The Qualcomm Equation. The Fool's disclosure policy doesn't see color or the wart on your nose.