Buy the Right Puppies

Congratulations! Your portfolio is perfect. The collection of companies that you have assembled is ... mwah, tres magnifique -- the perfect combination of bottle rocket and short wick. Celebrated investors like Warren Buffett, Peter Lynch, and David Gardner have you on speed dial. Riches beyond measure are just a few trading days away.

Now, I'd love to tell you that with a straight face. Really. I'd love to deny that I saw you nodding along with me just now. It's human nature, really. Every investor thinks he or she owns the best stocks. It's a bit like rooting for your alma mater's football team or cheering on that lottery ticket or roulette wheel. You think you've got a fighting chance to win -- or you wouldn't be there at all.

It's not hopeless. Beating the market is a lot easier than you think. It's just a matter of identifying the great growth stocks of tomorrow before the rest of the market comes around. Sound daunting? It isn't, really.

Best of breed in a flea-ridden world
By now, you've probably heard the expression "best of breed" countless times -- and you're probably wondering what it's all about. In the corporate software space, the phrase refers to cherry-picking the best applications that excel at a particular task. Instead of resorting to the integrated one-vendor solution suite, you assemble a hodgepodge of specialized brands. It's not the easy way out, but it is the best way.

When you think about it, investing is just like that. Even if your portfolio is heavily weighted toward a particular sector, or if there's a theme that resonates throughout your holdings, every stock you own is unique. To you, it was the best of its breed.

"Best of breed" has evolved in recent years. These days, it's the process of ferreting out the superior company in a particular sector. If you're talking about office supply retailing, Staples (Nasdaq: SPLS  ) is the company that has been growing at the expense of its rivals in a highly-fragmented industry. Smoothie shops? That's another fragmented sector, but you've got to like Jamba Juice (Nasdaq: JMBA  ) as it expands out of its Californian stronghold.

Even a niche like organic eats has its own "best of breed" growers. Obviously you know about the Whole Foods (Nasdaq: WFMI  ) chain of upscale grocery stores, but what about a company like Hain Celestial (Nasdaq: HAIN  ) that stocks many of the items inside? You may have never tried kefir, an Eastern European kissing cousin to drinkable yogurt, but if you do it will probably be the handiwork of Lifeway (Nasdaq: LWAY  ) .  

The market rewards excellence. That's why finding these top performers is often a financially rewarding quest. What could be better than that? Well, for one, identifying these best-of-breed companies just as they begin to shine.

Finding great growth stocks early is the goal of our Motley Fool Rule Breakers newsletter service. It's not an intimidating process. Who here doesn't know that DirecTV (NYSE: DTV  ) is the top dog in satellite television? When it comes to canned soups, do you really need to go any further than Campbell Soup (NYSE: CPB  ) ? However, even if you weren't familiar with their models, you still could have warmed up to their income statements.

Decelerate at the sign of acceleration
Under Armour
is a recent pick for Motley Fool Rule Breakers subscribers. You may know it for its moisture-controlling clothing, which has taken pro sports by storm. Last year, it made the bold move of entering the athletic footwear market with its "click clack" ad campaign for football cleats. Don't diss the shoes. Some of the market's best performers in recent years have been hot footwear makers.

How could investors have spotted something special in a company that specializes in outfitting winners on the playing field? You didn't have to dig a whole lot deeper than the top line here.

In 2005, Under Armour's revenue climbed an impressive 37%. Things got even better in 2006, with Under Armour's revenue ultimately marching 53% higher.

That's called accelerating growth. You just don't see it very often. Logic would dictate that as a company grows, it does so off a larger base of sales and earnings. That makes growth, on a percentage basis, more difficult to keep up with. Let's say a company produced revenue of $50 million one year, then $100 million the next. That's a cool 100% increase in revenue. If it clocks in at $160 million the following year, that $60 million more in sales is even better than the $50 million it generated a year earlier. However, on a sales-growth basis, it would simply mark a 60% improvement from the previous year's $100 million sum.

Sometimes, accelerating growth shows its welcome face over the course of a single year. Let's look at how online retailer Amazon.com increased its top line last year:

Year-Over-Year Sales Growth

Q1 2006

20%

Q2 2006

22%

Q3 2006

24%

Q4 2006

34%

20%? 22%? 24%? 34%? It was a welcome trend, especially as the company headed into the seasonally potent holiday quarter. After a slight sequential dip during this year's first quarter, Amazon got back to its top-line-accelerating ways with a blowout second-quarter showing.

The stock pick of the litter
Another recent top-line accelerator is Secure Computing. The computer security specialist had a respectable year in 2005. It increased revenue by 17% as companies took to its online solutions. But things got dramatically better in 2006, as Secure Computing's top line soared 62%.

Under Armour and Secure Computing share something else beyond a refreshingly potent case of accelerated growth. Both stocks have been singled out over the past year as Rule Breakers recommendations.

Of course, it helps if you understand why growth is accelerating. Whether you're looking at an established company with a suddenly vibrant new product (iPod, anyone?) or a promising upstart bent on rewriting the rules (like Amazon), knowing a little about the disruptive shift that's taking place helps. However, you can always lean back on the income statement. Organic acceleration in sales growth is nothing to scoff at.

If you don't want to screen for success alone, why don't you join us in the Rule Breakers community? We're doing just that around the clock -- and now you can kick the tires for free as part of a 30-day trial.

Congratulations! Your portfolio is perfect -- perfectly waiting for you to take the next step in market enlightenment.

This article was originally published Sept. 12, 2005. It has been updated.

Longtime Fool contributor Rick Munarriz owns a cocker spaniel but holds no shares in any of the companies in this story, other than Jamba. Secure Computing and Under Armour are Rule Breakers choices. Whole Foods and Amazon.com are Stock Advisor picks. The Motley Fool is investors writing for investors.


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