The Top Hypergrowth 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 of hypergrowth stocks, we'll screen for stocks with:

  • A market cap of at least $100 million.
  • A trailing compound annual revenue growth rate of at least 20% over the past five years.
  • A trailing compound annual earnings-per-share growth rate of at least 50%, again for the past five years.
  • A projected five-year EPS growth rate of at least 20%.
  • Net profit margins of at least 10% for the trailing 12 months.

Then we'll tap the collective intelligence of our 93,000-plus CAPS investors to see whether these companies present real opportunities today -- or whether there's reason to stay away.

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

Company

Projected EPS Growth Rate

Net Profit Margin

CAPS Rank (Out of 5)

Shengdatech (Nasdaq: SDTH  )

32.0%

26.9%

*****

Nasdaq OMX Group (Nasdaq: NDAQ  )

25.6%

21.3%

*****

Netease.com (Nasdaq: NTES  )

25.0%

57.1%

*****

InterContinental Exchange (NYSE: ICE  )

29.5%

41.9%

****

Shanda Interactive (Nasdaq: SNDA  )

20.5%

57.6%

****

LifeCell (Nasdaq: LIFC  )

30.0%

14.1%

****

Cogent (Nasdaq: COGT  )

21.3%

27.1%

****

Data from MSN Money. Star rankings from CAPS. Data as of March 26.

Growing, growing ... gone
With a population of 1.3 billion in the People's Republic of China and an increasingly prosperous middle class, how could online gaming in China not be a hypergrowth industry? According to a study by Pearl Research, the Chinese online gaming market grew 60% in 2007, and some games generated as much as $7 to $12 per month per user. And as the most popular games from companies such as Netease and Shanda garner subscribers by the millions, the money adds up quickly.

But although the macro factors pushing rapid growth are all good, the opportunities bring plenty of competition for all of those gamers. At this point, leading online game providers Shanda and Netease are both amazingly profitable: They keep more than 57 cents for every dollar (er, make that 57 sin for every yuan) that comes in the door. The issue that investors wrestle with today is that with so many ways to play the game segment, just how long and how profitable the industry will remain for those involved is less certain.

But even with a recent rash of new IPOs in the Chinese gaming market, CAPS investors generally favor the industrywide growth prospects. Between Shanda and Netease, both of which have a forward earnings multiple of just less than 14, investors give a slight edge to Netease and its popular Fantasy Westward Journey franchise. Of the 747 investors rating Netease, more than 97% believe the company will outperform the S&P.

Putting your finger on it
It's not as hot and exciting an industry as online gaming, but security and biometric identification solutions are nonetheless in high demand in both the private and government sectors. Leading fingerprint-identification company and Motley Fool Hidden Gems Pay Dirt recommendation Cogent earns high margins doing something not many others can do -- providing advanced biometric identification solutions to law-enforcement and government agencies that are increasingly concerned about quickly and positively fingering the baddies out there.

But despite the profitability and gobs of cash that Cogent has managed to generate for investors, the company's rapid revenue growth reversed in 2006 with a 36% drop and then mustered only 4% growth in 2007. Losing out on some major contracts and delays in other system deployments led to the revenue shortfalls, but CEO Ming Hsieh sees this situation as temporary and is confident that new contract awards and follow-on business will help the company "return to stronger revenues in 2008."

A good majority of CAPS investors are confident in Cogent as well. Our players cite the long-term trends favoring biometric technology and Cogent's prominent position in the industry. Of the 112 CAPS All-Stars rating the company, 105 have voted for the company to beat the market.

Let 93,000 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.

The Motley Fool Rule Breakers service looks for companies, such as picks Shanda and Netease, that can change the way things are done. To see just what companies the analyst team recommends snapping up today, take a free 30-day trial.

Fool contributor Dave Mock does his best to color within the lines, but he reserves his right to artistic expression. He owns no shares of companies mentioned here. He is the author of The Qualcomm Equation . Cogent is a Motley Fool Hidden Gems Pay Dirt recommendation. Nasdaq is an Inside Value pick. The Fool's disclosure policy doesn't see color or the wart on your nose.


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