5 More Unloved Growth Stocks

Ah, the joys of skepticism.

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

Hitting just one of these home runs can make all the difference to your portfolio. Just ask David Gardner, who bought Amazon.com at a split-adjusted price of $3.24 a share in 1997. He's up more than 2,300% since.

Stocks like Amazon helped David produce nine years of better-than-20% average annual returns in the real-money Rule Breaker portfolio, even while suffering stinging losses from Guitar Center and 3Dfx, among others.

Let the haters be your friends
David continues this home-run investing tradition today at Rule Breakers. You can follow the moves of his rebel alliance with a free trial to the service. Or, if you prefer to pick your own stocks, there's Motley Fool CAPS, a 100% free stock-picking community whose 81,000 participating investors rate stocks on a scale of one to five stars. More than 5,300 rated companies are in the database right now.

How can this help you? Each week, using CAPS, we'll 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

SunPower (NASDAQ:SPWR)

**

8.50%

41.9%

ArthroCare (NASDAQ:ARTC)

*

31.90%

26.2%

SurModics (NASDAQ:SRDX)

**

27.90%

25%

Urban Outfitters (NASDAQ:URBN)

**

19.00%

24.3%

ZymoGenetics (NASDAQ:ZGEN)

**

11.40%

15%

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.

At first, I was tempted to go with SunPower. Solar stocks have fallen so far, so fast that the valuations are finally starting to get reasonable. Even more so with SunPower, whose 1.64 PEG ratio is downright cheap when compared to First Solar's (Nasdaq: FSLR  ) 2.5. (No surprises there. My Foolish colleague Jim Gilles cites valuation in naming First Solar as one of the worst stocks for 2008.)

A stent to prop up your portfolio
But as much as I'm in favor of solar power, my favorite unloved growth stock from today's list is drug delivery and medical coatings maker SurModics. I like its accelerating free cash flow margins:

Numbers in Millions

FY 2007

FY 2006

FY 2005

FY 2004

Revenue

$73.2

$69.9

$62.4

$49.7

Free cash flow

$41.3

$29.3

$18.8

$17.7

FCF margin

56.4%

41.9%

30.1%

35.6%

Source: Capital IQ, a division of Standard & Poor's; fiscal year ends Sep. 30 in the named year.

Such gains are often the result of a sustainable competitive advantage that confers pricing power. CAPS investor cccruz sees one. Here's how he put it in July:

Still has 5 potential opthamology deals to be signed in addition to Merck (NYSE: MRK  ) . Diverse portfolio of customers and products. Great patent coverage. No debt. Recent stock buyback. High short interest due to investors who feel SurModics is a one trick pony with stents.

I'll add that, while some investors have sold, some of the best have been buying -- including the five-star Neuberger Berman Genesis (NBGBX) fund. Insiders, meanwhile, still own close to 16% of the company.

I'll side with them. SurModics joins my CAPS watch list today. But that's me. What about you? Would you buy SurModics 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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