Category 5 Stocks

I lived through Hurricane Andrew in 1992. It was only the third Category 5 storm to make landfall in the United States in recorded history, and it was a doozy. I remember waiting for the deafening gusts to subside before venturing out to see the savage destruction that the killer storm had caused.

When it comes to windstorms, Category 5 is as intense as they get. When it comes to investing, growth stocks would be the market's equivalent.

Growth stocks are powerful, which can sometimes be a good thing. Find the right stock on the cusp of blowing apart the landscape, and you can go from being a modest investor to a rich one in the blink of a hurricane's eye. Think Salesforce.com (NYSE: CRM  ) , just as it was redefining the way enterprise software is used by providing a cheaper Web-based solution. Imagine buying into computer security firms like McAfee (NYSE: MFE  ) or Symantec, just as viruses and spyware programs began inflicting the PC industry.

By the same token, growth stocks are volatile. I saw it when I stepped outside my home in 1992. You can see it, too, in a portfolio ravaged by the wrong growth stocks. Planet Hollywood? 3DO? They both blew my portfolio to pieces way back when.

Bracing for the big one
Snapping up the right growth stocks is the aim of the Motley Fool Rule Breakers investing service. Every month, David Gardner leads a team of analysts in unearthing a couple of ultimate growth stock ideas. When he's right, Category 5 investing can be a thing of beauty. Five of the 24 recommendations from 2005 have gone on to more than double. Three have more than tripled in value! When he's wrong, the damage can be brutal. Fourteen of 2007's picks are sporting double-digit losses.

The key to aggressive growth-stock investing is to let your winners run. If you land that 10-bagger, nine other similar investments can go to zero and you'll still break even.

Taking chances has led the service to single out some pretty eclectic -- if not outright eccentric -- companies. Blue Nile (Nasdaq: NILE  ) has handily beaten the market since David's initial recommendation. The online jeweler specializes in high-end engagement rings, a market that companies like Overstock.com (Nasdaq: OSTK  ) dare not touch.

Shanda Interactive (Nasdaq: SNDA  ) is another intriguing storyteller. The company was the market leader in China's booming online gaming industry. Once other companies moved into the space, Shanda took a chance by offering free multiplayer games, charging for add-on accessories. It's worked thus far, helping Shanda claw its way back.  

Buying into online jewelers and fantasy game creators can be risky. That's OK. Disruptive technology may not disrupt overnight, but when it does, the upticks can come in a hurry. It's better to be early -- like buying into Google at an initial offering so out of favor that it was marked down from as high as $135 to its ultimate IPO price of $85 -- than late, like buying Apple (Nasdaq: AAPL  ) earlier this month as it was heading into a Macworld conference with more hype than it could sustain.

I'm fortunate enough to have been with The Motley Fool in the mid-1990s, when David was recommending companies such as America Online, PayPal, and Amazon.com. They seemed like radical investments at the time. AOL (now part of Time Warner) was battling it out in the cutthroat realm of dial-up online services. PayPal (now part of eBay) was battling established financial-services titans in the field of online micropayments. Amazon was trying to turn retail distribution upside-down by shipping book orders placed online directly to the end user. AOL, PayPal, and online shopping took off, and so did David's real-money Rule Breaker portfolio. 

Andrew, 15 years later
The storms keep coming. I still live in Miami, so I've had my share of windstorms come by in recent years. Two years ago, Katrina and Wilma came. 

Last summer, I looked at investing styles and labeled them as hurricane categories:

Wrapping things up with the most powerful -- and sometimes deadly -- basket of stocks makes sense. I'm part of the Rule Breakers team of analysts. I buy stocks in all shapes and flavors, though I'm always smitten by a good young growth stock with a great story to tell.

I don't mind the exotic. I don't fear Category 5 investing. 

Are you a Category 5 investor? If so, want to learn more about these powerful stocks? Give Rule Breakers a spin with a free 30-day pass to see if growth investing is right for you.

This article was originally published July 21, 2006. It has been updated.

Longtime Fool contributor Rick Munarriz believes in taking chances to earn superior returns. He does not own shares in any of the stocks in this story. Blue Nile and Shanda are Motley Fool Rule Breakers recommendations. eBay, Time Warner, and Amazon.com are Stock Advisor picks. Symantec is an Inside Value selection. The Fool has a disclosure policy.


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