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4

5 Top Tweeners

If you've ever sought serious riches from stocks, then you've owned a tweener.

Neither an up-and-coming superstar nor a dominant veteran, tweeners are poised precariously in between. They're not as hot as they once were, and they're vulnerable to young upstarts and old stalwarts. But they've honed their skills enough to remain a force to be reckoned with.

The stock market has plenty of tweeners. They'll either create billion-dollar fortunes as they come to dominate industries, as Cisco and Microsoft have, or they'll be destroyed in the process, as Gateway almost was. That's the problem -- investing in tweeners can be dangerous and  exceptionally profitable. By picking his winners well, David Gardner produced nine years of 20% average returns hunting for misunderstood multibaggers in the making. His team at Motley Fool Rule Breakers continues the tradition today.

Let's have the list
You, too, can join this effort, thanks to Motley Fool CAPS. Each week, we use the database to find three-star stocks that are expected to boost earnings by at least 15% annually over the next five years. Here are the latest contenders:

Company

CAPS Rating

5-Year Growth Estimate

VMware (NYSE:VMW)

***

46.1%

Under Armour (NYSE:UA)

***

25.8%

NutriSystem (NASDAQ:NTRI)

***

21.5%

Starbucks (NASDAQ:SBUX)

***

20.2%

China Digital TV (NYSE:STV)

***

20.0%

Sources: Motley Fool CAPS, Yahoo! Finance.

Bear in mind that this is not a list of recommendations -- merely candidates for further research.

Of these, I'm sorely tempted to go with VMware, which reports earnings later today, and is far more reasonably valued than its 1.56 forward PEG ratio would have you think. Why? Free cash flow, my dear Fool.

A chink in Under Armour?
Interestingly, it's a lack of free cash flow that appears to have investors doubting the long-term durability of Nike (NYSE: NKE  ) rival Under Armour. Here's how CAPS investor potsticker put it in a pitch last week:

This is another grow fast, but don't create a lot of value companies. FCFE (free cash flow to equity) was negative last year ... Assuming most of the $15 million in [capital expenditures] was for expansion, FCFE could have been around $12 million. Grow that at 8% per year and sell the company for 15x FCFE in five years. In the end you wind up with a company valued somewhere south of $10 per share.

I'll not quibble over the math. What I will quibble with is the multiple -- 15 times cash flow? I can't see how that's reasonable for a company growing as fast as Under Armour is. Instead, I agree with David Gardner, who justified UA's premium valuation -- 36 times earnings as of this writing -- in his October re-recommendation of the stock:

Under Armour is one of my Core Rule Breakers because I believe it's building a rock-solid brand in shoes and sportswear that will dominate for decades to come. It's hard to discount that future to a present value, but the key here is to watch Under Armour's brand and reputation. Trouble there would give me more pause than any of the sky-high metrics you could choose to recite.

Do you agree? Would you buy Under Armour at today's prices? Let us know by signing up for CAPS now. It's 100% free to participate.

See you back here next week for five more top tweeners.


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Tim Beyers
TMFMileHigh

Tim Beyers first began writing for the Fool in 2003. Today, he's an analyst for Motley Fool Rule Breakers and Motley Fool Supernova. At Fool.com, he covers disruptive ideas in technology and entertainment, though you'll most often find him writing and talking about the business of comics. Find him online at timbeyers.me or send email to tbeyers@fool.com. For more insights, follow Tim on Google+ and Twitter.

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Related Tickers

7/30/2015 10:21 AM
UA $98.75 Down -0.07 -0.07%
Under Armour CAPS Rating: ****
NKE $114.52 Down -0.40 -0.35%
Nike CAPS Rating: *****
NTRI $29.48 Up +4.27 +16.94%
NutriSystem, Inc. CAPS Rating: **
SBUX $57.23 Down -0.28 -0.49%
Starbucks CAPS Rating: ****
VMW $87.21 Down -0.02 -0.02%
VMware CAPS Rating: ****

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