Color to the Numbers: Top Hypergrowth Stocks

• Email
• Share
• Print

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. 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, not core operations, for instance.

Just like the color-by-numbers books kids doodle on, the picture for stocks pulled from any screen isn't clear until we add the appropriate hues. In this edition of "Color to the Numbers," we'll enlist Motley Fool CAPS for a Foolish look at a screen for hypergrowth stocks, examining which stocks merit further investigation, 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. By pulling up a stock quote in CAPS, investors can see how the collective community rates a company, and compare it with the opinion of the very best All-Star stock pickers -- CAPS players with a ranking greater than 80. There's even pitch commentary and blogs to lend detail to the bull and bear opinions. In all, CAPS gives investors far more qualitative resources than mere numbers and tables.

Today's growth screen uses 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 50%
• 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. 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.

Company	EPS Growth Rate	Net Profit Margin	CAPS Rank (out of 5)
ICICI Bank (NYSE: IBN)	156%	24.2%	*****
BHP Billiton (NYSE: BHP)	64%	34.7%	*****
Freeport-McMoRan (NYSE: FCX)	79%	26.3%	*****
Ultra Petroleum (NYSE: UPL)	67%	35.5%	****
Mindray Medical (NYSE: MR)	53%	26.1%	*****
VimpelCom (NYSE: VIP)	77%	18.7%	*****
Cognizant Technology (Nasdaq: CTSH)	60%	16.2%	*****

Data from MSN Money. Star rankings from CAPS. All data as of Sept. 26.

As China's economy zips along at a rapid clip, demand for medical devices in hospitals and clinics around the populous country is surging. Mindray Medical is China's largest medical device company, riding the trend to improved health care. But domestic sales are not the secret sauce behind Mindray's rapid growth. Selling its products into other countries is fueling revenue growth outside China, to the tune of 60%.

While Mindray is definitely priced for rapid growth, with a P/E greater than 70, some CAPS investors think the company's dominance of the lower end of the market will scale in the future, consuming a larger portion of the international medical device market. While I personally balk at paying a high price for growth, Mindray's leadership position and rapid growth have convinced an overwhelming majority of CAPS investors to give the company a bullish rating. Some 661 out of the 671 investors rating the company give it the thumbs up.

Another international company on the hypergrowth list is Indian financial institution ICICI Bank. The company provides a wide range of consumer and business banking services to India's growing population, including credit cards, investment banking, and mortgages. While the company was priced on sale earlier in the year, a 25% rise in shares year to date has since elevated shares of India's largest private bank to nearly 30 times earnings.

The subprime lending scare in the U.S. helped drop ICICI Bank's shares below $40 per share last month, before the company reassured investors that it had no exposure to subprime loans. Shares have largely recovered in the weeks since, and CAPS investors continue to vote favorably on the company. Today, almost 99% of CAPS investors rating the company believe it will beat the S&P going forward.

Let 65,000 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.