Color to the Numbers: Top High-Margin Growth Stocks

Financial websites have given investors more tools than ever to screen the markets for stock ideas. But those screens provide just the raw numbers -- not the story behind them. What might look like the start of a trend could merely be a one-time blip. Let's enlist Motley Fool CAPS to color in the outlines these numbers create.

To find the cream of the crop among high-margin growth stocks with a solid financial foundation of highly profitable operations, we'll screen for stocks with:

• Market cap of at least $100 million.
• Gross margin of at least 80%.
• Trailing-12-month net margin of at least 15%.
• Estimated annual earnings growth of at least 15% for the next five years.

Then we'll tap the collective intelligence of our 83,000-plus CAPS investors to see whether these companies present real opportunities -- or whether they're priced beyond reason.

Opinions with the numbers
Here's a sampling from the list of stocks our screen pulled up today.

Magic margin pill
No matter how you look at it, a company that can return net margins of 38% should turn the head of any investor. That level of profitability is typical for biopharmaceutical firm Gilead Sciences, though, as long as you don't count the $2.4 billion expense the company took for in-process R&D in connection with several acquisitions in 2006.

Even digging deeper and looking beyond just bottom-line profitability, there's little not to like about Gilead. The company generates an enormous amount of free cash flow on the back of treatments Truvada and Atripla, which are used extensively in the U.S. to treat HIV. And even with patent protection on many of its top drugs for another decade, Gilead maintains a robust pipeline of new drugs under development.

Performance rarely comes cheaply, of course, and Gilead is certainly priced for continued success. The company currently carries a forward earnings multiple of 24, but considering that revenue is growing at 40% annually, and free cash flow has been growing even faster, the reasonable premium makes it potentially the best stock for the coming year. CAPS investors largely agree, with 836 of the 862 who've rated the company voting for it to outperform the broader market in the future.

Marginal Telecom
While it's common to see software and pharmaceutical companies with exceptional margins, wireless operators typically have heavy capital investment costs that keep net margins low. Not so with Russian carrier Vimpel Communications (or VimpelCom for short), which sports a 20% net margin. VimpelCom is growing rapidly, expanding its Beeline wireless services throughout Russia and the Commonwealth of Independent States (CIS).  

Growth from emerging markets made VimpelCom one of five wireless stocks that doubled in 2007, and VimpelCom wants to keep the momentum alive with the acquisition of Golden Telecom. Acquiring the fixed-line service provider will allow VimpelCom to bundle services in an effort to further expand its customer bases and lower costs -- all to become even more profitable than it already is.

Like Gilead, VimpelCom trades at a rich multiple -- 29 times trailing earnings, to be exact. But the forward P/E is 18, which is more reasonable, particularly when you consider that analysts expect the company to grow at a 26% rate in the coming years. Even though it's hard to believe a stock that has shot up 17 times in value over the past five years can still go higher, a strong contingent of CAPS investors believe it will. Indeed, nearly 98% of the 932 investors rating the company think it will beat the S&P going forward.

Let 83,000 investors be the judge
The collective wisdom of a huge pool of investors can quickly add color to a whitewashed page of numbers. But even with an entire community of qualified opinions acting as the judge, individual investors are still the jury and should perform their own research.

Want to see your favorite screen results run through the wringer in the CAPS community? It's free to tap the knowledge base, and even give your own opinion, in Motley Fool CAPS.