Wednesday's Top 5 Growth Winners

Ask cheapskate value investors to buy a stock that's achieved a new 52-week high, and you'll get one of two responses:

  1. Hysterical laughter.
  2. Sudden nausea.

Pity them, Fool.

How many times did American Eagle Outfitters (NYSE: AEO  ) touch a new 52-week high on its way to becoming one of the 10 best stocks of the past decade? Too many to count, of course.

Let that be a lesson. Rocket stocks -- that is, high-growth stocks that are also realizing heavy price appreciation -- are sometimes worth buying.

Rocket stocks, not rocket science
And sometimes they're worth buying in bulk. Think of Baidu.com. My buddy Rick Munarriz recommended China's top search engine to our Rule Breakers subscribers at $83.37 in October of last year.

I thought he was nuts. I mean it. The stock was both expensive and on a tear. So, I argued against buying it in a January duel here at Fool.com. Now Baidu is a four-bagger. How I wish I had listened to what Rick was telling me those months ago.

Don't do as I did. Never assume an expensive stock is too expensive. What looks like a cliff could really be base camp on a climb toward the summit of Everest. Each day in this column, with the help of the 77,000 pro and amateur stock pickers in our Motley Fool CAPS community, we'll seek to find those still climbing.

Our candidates will be found daily in the 52-week high lists at The Wall Street Journal. But few highfliers will make the cut; we're looking for stocks expected to boost net income by at least 15% annually over the next five years and that earn at least two of five stars from our CAPS contingent.

Here are today's candidates for your consideration:

Company

Closing Price

CAPS Rating
(5 max)

5-Year Growth Estimate

52-Week
Range

MercadoLibre (NASDAQ:MELI)

$50.80

****

40%

$21.00-$53.92

EMCORE (NASDAQ:EMKR)

$11.46

****

30%

$3.84-$11.67

MEMC Electronic Materials (NYSE:WFR)

$84.91

****

29.6%

$39.00-$88.62

Sucampo Pharmaceuticals (NASDAQ:SCMP)

$15.62

**

19%

$10.16-$16.24

Elan (NYSE:ELN)

$24.52

***

15%

$11.70-$24.90

Sources: The Wall Street Journal, Yahoo! Finance, Motley Fool CAPS.

Our mostly small-cap list features some promising though speculative stocks. Yet these tiny titans can create astounding returns if bought before they get discovered. Witness chipmaker EMCORE, which is up more than 100% over the past 52 weeks. That easily beats the S&P 500's 5% return over the same period.

No. Not nacho libre ...
Businesses producing mountains of free cash flow are often behind those sorts of outsized returns. Businesses like eBay (Nasdaq: EBAY  ) . Or, better yet, MercadoLibre -- eBay's distant Latin American cousin.

Why is it better? MercadoLibre today is the sort of high-growth story that eBay was five years ago. And it's growing into a free cash flow machine:

Metrics (in millions)

Trailing 12 Months

2006

2005

2004

Net income

$6.2

$1.1

$2.4

($2.2)

Cash from operations

$10.2

$6.2

$3.4

($1.5)

Capital expenditures

($2.7)

($2.1)

($1.5)

($1.9)

Free cash flow

$7.5

$4.1

$1.9

($3.4)

Sources: Yahoo! Finance; Capital IQ, a division of Standard & Poor's.

I notice two things from this chart. First, FCF outstrips net income. Second, MercadoLibre is producing successively higher cash flows. Yummy.

If there's one problem with MercadoLibre it's with its spicy valuation. My Foolish colleague Rick Munarriz addressed that a month ago:

Sure, MercadoLibre isn't exactly cheap. It's fetching 216 times this year's profit target and 87 times next year's bottom-line projection. However, the disparity between the two numbers tells you all you need to know about the company's torrid growth. With earnings poised to soar by 147% next year, 87 times forward profitability isn't an outlandish sum for a company that's just starting to grow in its core Argentinean and Brazilian markets, even as it expands into neighboring countries.

Well put, Rick. MercadoLibre joins both my CAPS and real watch lists today.

But that's me. What's your take? Would you buy MercadoLibre at today's prices? Let us know by signing up for CAPS. It's 100% free to participate.

I'll be back tomorrow with more rocket stocks.

Jingle bells
For every post you make to CAPS or any Foolish discussion board in the month of December, The Motley Fool will donate $0.02 to charity. So give us your 2 cents and we'll pay it forward!

To learn more about the My 2 Cents campaign and how you can help us raise money for five very Foolish charities, check out our Foolanthropy page.


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