A Universe of Great Stocks

"Prediction is hard, especially about the future." Niels Bohr and Yogi Berra had it right, and their wisdom applies just as well in investing (makes you wonder how much else the Nobel-winning physicist and Hall of Fame catcher have in common).

Finding the stocks that will power your portfolio into the future can be a daunting task. While growth stocks can offer incredible returns -- think of Nokia (NYSE: NOK  ) and Nike (NYSE: NKE  ) -- the duds among this asset class have historically made it one of the worst places for your money. That's too bad, because finding a great growth stock before the broader market does is one of the most rewarding experiences in investing.

Growth investing is often more art than science, so there's no surefire way to spot these companies. But some investors have been able to consistently find these businesses and ride their coattails, and I have spotted one of them: Fool co-founder David Gardner. Here's the five-step process David uses to make his recommendations for Motley Fool Rule Breakers. He asks himself:

  • What is the market cap potential in five years?
  • What is the probability of that happening?
  • How strong is the branding position of the company?
  • How strong are the core values of the company?
  • What does the competition look like (less is more)?

This simple framework will help you find great companies with great people with great potential. And if you find enough of those, there's likely to be a big winner among them.

Where to start
Of course, now you need some companies to put through that five-part test. Allow me to introduce you to our Rule Breakers Universe.

The Rule Breakers Universe is a collection of companies that Rule Breakers is watching as we search for the next great growth stocks. The universe brings together companies with dynamic rates of growth and revolutionary or disruptive forces that are undermining status quo business models.

Bookmark the Rule Breakers Universe tag to keep an eye on these companies -- you'll see the group's one-day, 30-day, and one-year performance alongside each stock's CAPS rating. CAPS is the Fool's community stock-rating database that brings together thousands of investors' opinions on thousands of stocks, and it's a treasure trove of information and ideas.

The next great growth stock
We'll be watching this universe as we continue our search for great growth stocks, and so should you. Take a look at Nam Tai (NYSE: NTE  ) , which is designing components for telecommunications tools and toys. Or Hansen Natural (Nasdaq: HANS  ) , whose Monster Energy drink leads its popular beverage line.

A quick scan of the Rule Breakers Universe reveals many more possibilities, including:

Company

Sector

CAPS Rating*

Digital River (NASDAQ:DRIV)

Technology

4 stars

Hansen Natural

Consumer goods

4 stars

Mobile Mini (NASDAQ:MINI)

Industrial goods

5 stars

Nam Tai

Technology

5 stars

Sina (NASDAQ:SINA)

Technology

3 stars

YM BioSciences

Health care

5 stars

*Out of five stars. Data as of Jan. 24, 2008.

Beyond the universe
At Rule Breakers, we use the universe as part of our search to find two stock recommendations each month, companies we think will be the next great growth investments. Several companies have already made the leap from the universe to become full-fledged recommendations. One is Chipotle Mexican Grill, where smart expansion and strong cash flow are on the menu -- and a 107% gain is on the Rule Breakers scorecard after one year.

You can see what else we've found so far in our search for great growth stocks with a free trial to Rule Breakers. Click here to check out all our past recommendations and analysis, join our discussion boards, read exclusive CEO interviews, and more, all free for 30 days.

Predicting the future of investing will never be easy, but finding the companies that will lead the way -- on growth potential, branding, core values, and competitive edge -- is a great place to start. You just need to know which corner of the universe to look in.

This article was originally published Dec. 13, 2006. It has been updated.

Believe it or not, Yogi Berra has much more to say on investing. Rule Breakers editor Rik Silverman does not own shares of any company mentioned. Nam Tai is a Global Gains recommendation. Mobile Mini and Sina are Stock Advisor recommendations. Chipotle is also a Hidden Gems recommendation. You can observe a lot about the Fool's disclosure policy just by watching.


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