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 (Nasdaq:  AMZN  ) at a split-adjusted price of $3.24 a share in 1997. He's up more than 2,000% since.

It's stocks like Amazon that helped David to 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 of the service. Or, if you prefer to pick your own stocks, there's Motley Fool CAPS, a 100% free stock-picking community whose 85,000 participating investors rate stocks on a scale of one to five stars. More than 5,400 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

Netflix (Nasdaq: NFLX  )

**

33.80%

19.4%

Advanced Medical Optics (NYSE: EYE  )

**

11.10%

19.0%

Lazard (NYSE: LAZ  )

**

7.60%

17.5%

Texas Industries (NYSE: TXI  )

**

18.70%

17.2%

Ariba (Nasdaq: ARBA  )

**

9.30%

15.0%

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.

Those who read this column know of my affection for Netflix and its insanely cheap cash-flow multiple. Investors who bought into my thesis this week gorged on a heaping helping of returns. Higher guidance will do that to a stock.

Pass the popcorn. This movie isn't over.
Yet by my math, it still isn't too late to buy. Grab your calculator and follow along.

Netflix today trades for roughly 7.9 times its $245.8 million in 2007 free cash flow. That'd be reasonable if Netflix were producing little or no growth in this area. But that's not the case; FCF was up 11% in 2007, and it has improved by more than 23% a year since 2004.

What's more, neither of Netflix's primary competitors -- Blockbuster (NYSE: BBI  ) and nearly bankrupt Movie Gallery -- produced a penny of free cash flow last year.

Of the others Yahoo! Finance identifies as participants in the music and movie store industry, only micro cap Hastings Entertainment, which trades for 5.7 times trailing FCF, took in cash during 2007. But Hastings isn't the grower Netflix is; the business has burned cash in two of its last three fiscal years.

Surely we can agree that Netflix is a better business than Hastings, and deserves a much higher multiple. Say, something equal to its trailing growth rate? At 11 times FCF, Netflix would be worth $2.7 billion in market value, or a 40% premium to yesterday's close.

And if its online video service continues to surge? Netflix at $2.7 billion will look cheap.

But that's my take. What's yours? Would you buy Netflix 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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