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 Callaway Golf (NYSE: ELY  ) , just as the oversized golf club maker is breaking out its Big Bertha driver. Imagine buying into Research In Motion (Nasdaq: RIMM  ) just as the BlackBerry was starting to gain traction, instead of today, when it has already crushed Palm (Nasdaq: PALM  ) in the smartphone market and amassed more than 14 million users.

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. Six of the 24 recommendations from 2005 have gone on to more than double. Four have more than tripled in value! When he's wrong, the damage can be brutal. Seventeen 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. Steiner Leisure (Nasdaq: STNR  ) might have seemed like a cookie-cutter spa-services provider, if not for its proficiency at running shipboard spas. As cruise ships became frustrated with maintaining the specialized staffs spas require, they've increasingly turned to Steiner, creating a coattail play on the cruising industry that is actually growing faster (and with more consistent profitability) than the sector itself.

Akamai Technologies (Nasdaq: AKAM  ) is another intriguing storyteller. The Web would be dreadfully slow if Akamai weren't there to serve up cached pages and speed up the secure delivery of chunky files. The emergence of competitors such as Limelight (Nasdaq: LLNW  ) may have stifled the pricing flexibility of a pioneer like Akamai, but the company is still in the pole position of a dynamic industry.

Buying into floating massages and cyberspace speedsters 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 a comparatively meager and unloved $85 -- than late, like buying into China's Global Sources (Nasdaq: GSOL  ) after the IPO glow of larger B2B player Alibaba wears thin.

I'm fortunate enough to have been with The Motley Fool in the mid-1990s, when David was recommending companies such as America Online 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. Amazon was trying to turn retail distribution upside-down by shipping book orders placed online directly to the end user. AOL 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. 

Two years ago, 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 whether 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. Palm, Amazon.com, and Time Warner are Stock Advisor recommendations. Steiner Leisure and Akamai are Rule Breakers picks. The Fool has a disclosure policy.


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