Let the Rally Begin

Is growth back? It sure seems so. Once a dot-com bust, Oracle (Nasdaq: ORCL  ) has returned to the resurgent ranks of tech growth stocks with a blowout first quarter.

More gains 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 Fidelity Magellan 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, 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 stocks 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 ExxonMobil and bought Apple (Nasdaq: AAPL  ) .

Funding growth
Then there's small growth go-getter Vanguard Explorer, which trailed the market by six percentage points in 2006. This year, Explorer's managers are betting on speedsters like digital travel agent Priceline.com (Nasdaq: PCLN  ) , payments processor VeriFone (NYSE: PAY  ) , and specialty braces manufacturer Align Technology (Nasdaq: ALGN  ) . Their go-go style has edged past the S&P 500 year-to-date.

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, featuring more than 10 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 mangers that have 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 on 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 Nov. 14, 2006. It has been updated.

Fool contributor Tim Beyers owned shares of Oracle at the time of publication. Vanguard Explorer is a Champion Funds selection. Priceline.com and Starbucks are Stock Advisor selections. The Motley Fool's disclosure policy is a rebel with a cause.


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