5 More Unloved Growth Stocks

Ah, skepticism, how I love thee.

We rebel investors at Motley Fool Rule Breakers believe the multibaggers in the making, while not often cheap by the numbers, are always misunderstood. As such, they face extraordinary skepticism, which, in turn, makes them excellent value stocks.

More are out there. Each week, right here in this column, we'll hunt them down. Grab your keyboard.

What one stock can do for you
Really, it's worth your time. One home run stock can make all the difference to your portfolio.

Just ask David Gardner, captain of the good pirate ship Rule Breakers, who bought Amazon at a split-adjusted price of $3.24 a share in 1997. He's up more than 2,700% since.

That helped him to overcome stinging losses from Guitar Center, 3Dfx, and others to put up nine years of better than 20% average annual returns as the leader of the real-money Rule Breaker portfolio.

Let the haters be your friends
Today, David and his team still seek misunderstood growers. You can, too, with the help of our completely free-of-charge Motley Fool CAPS investor-intelligence database, which currently contains information on more than 5,300 stocks.

CAPS applies user input to rate stocks from one star (low) to five (high). Using CAPS, we're once again going to search for one- and two-star stocks that have at least 5% of their available shares sold short but are expected to grow their earnings by no less than 15% over each of the next five years.

Let's have the list
Here are today's unloved growth stocks:

Company

CAPS Rating

Short Interest

5-Year Growth Estimate

Live Nation (NYSE:LYV)

**

11.50%

59.7%

Fortress Investment Group (NYSE:FIG)

**

11.80%

42.5%

Red Hat (NYSE:RHT)

**

8.00%

22.7%

NetLogic Microsystems (NASDAQ:NETL)

**

25.40%

20.8%

salesforce.com (NYSE:CRM)

*

7.00%

44.8%

Sources: Motley Fool CAPS, Yahoo! Finance.

Bear in mind that this isn't a list of recommendations. Instead, I offer these stocks as candidates for further research.

I was initially tempted by hedge fund operator Fortress and its mouthwatering 0.37 PEG ratio. Trouble is, assets under management -- a key measure of investors' willingness to keep money with the firm -- declined sharply from Q2 to Q3. (Though, to be fair, AUM are up from last December.)

Let the salesforce be with you
We all know that last week's hottest stock was IPO NetSuite (NYSE: N  ) , which debuted at $26 last Thursday and closed at $39.14 on Friday. And most of us assume that NetSuite's larger peer in software-as-a-service (SaaS), salesforce.com, is too expensive to own.

A cursory check of the numbers favors the majority view. To review:

  • salesforce.com trades for 203 times next year's earnings.
  • Return on capital went negative in the last fiscal year.
  • Gross margin has declined in each of the last three fiscal years.

But none of these numbers is as important as those you'll find in this table:

Numbers In Millions

Trailing 12 Months

FY2007*

FY2006*

FY2005*

Cash from operations

$161.6

$111.2

$95.9

$55.9

Capital expenditures

($42.8)

($22.1)

($23.4)

($4.3)

Free cash flow

$118.8

$89.1

$72.5

$51.6

Source: Capital IQ, a division of Standard & Poor's.
*Fiscal year ends on Jan. 31 of the named year.

Do the math, Fool. That's 35% annualized growth.

What's more, when you look at the stock through these green-colored lenses, salesforce.com trades for 68 times its trailing FCF. Is that reasonable? Not unless the company boosts cash flow faster than it ever has. But I doubt SAP (NYSE: SAP  ) or another suitor would be swayed by the premium. With salesforce.com's huge lead in SaaS, it's just too easy for me to envision the company as one of the next great software buyouts.

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

See you back here next week for five more unloved growth stocks.

Help us in our goal to give every young person around the globe a financial education! Learn more about the new direction of Foolanthropy, now in its second decade, here.


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