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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 2,500% 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:


CAPS Rating

Short Interest

5-Year Growth Estimate

InterOil (AMEX:IOC)




Red Hat (NYSE:RHT)




bebe Stores (NASDAQ:BEBE)




Big Lots (NYSE:BIG)








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.

Those who read my regular CAPS commentary already know that I favorBig Lots, along with retailing peers Guess? (NYSE: GES  ) and Gymboree. Mr. Market's persistent pessimism only makes the big-box discounter more attractive to my inner bargain shopper.

Palm, not so much -- even though two years ago I was very bullish on the company's long-term prospects. All I see now is a beleaguered smartphone vendor that can't keep up with peers such as Nokia and Research In Motion (Nasdaq: RIMM  ) .

That fedora looks good on you
To some, Red Hat feels similar -- a niche provider of Linux operating system software that could be had for free. The trouble with that view is that it fails to account for how good the Big Fedora has become at transforming revenue into free cash flow. Behold:

Numbers in Millions

Trailing 12 Months

FY 2007

FY 2006

FY 2005






Free cash flow





FCF margin





Source: Capital IQ, a division of Standard & Poor's. The company's fiscal year ends on the last day of February in the indicated year.

Like you, I see that FCF and FCF margins have declined recently, but overall cash flow is way up since the end of fiscal 2005. And here's what you don't see: Returns on capital, while a bit choppy, have shown steady signs of improvement over the past several years.

With global demand for open-source -- that is, Linux -- systems still on the rise, it's a good bet that Red Hat will continue to produce higher cash flows and growing returns on its available capital. And yet the stock trades for just 24 times this calendar year's projected earnings and 20 times next year's estimate. Not much for a business that's grown far faster than that over the past five years and which is projected to produce 22% average annual bottom-line gains to 2012. Red Hat joins my CAPS watch list today.

But that's me. What about you? Would you buy Red Hat 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.

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10/20/2016 4:00 PM
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