5 More Unloved Growth Stocks

Ah, the joys of skepticism.

We rebel investors at Motley Fool Rule Breakers believe that 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.com at a split-adjusted price of $3.24 a share in 1997. He's up more than 2,300% since.

Stocks like Amazon helped David 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 to the service. Or, if you prefer to pick your own stocks, there's Motley Fool CAPS, a 100% free community whose 100,000-plus participating investors rate stocks on a scale of one to five stars. More than 5,600 rated stocks are in the database right now.

How can this help you? Each week, using CAPS, we'll search for companies rated one or two stars that have at least 5% of their available shares sold short, but which 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 (5 max)

Short Interest

5-Year Growth Estimate

lululemon athletica (NASDAQ:LULU)

**

95.4%

39.4%

Insulet (NASDAQ:PODD)

**

10.2%

30.0%

EMCORE (NASDAQ:EMKR)

**

31.4%

30.0%

TiVo (NASDAQ:TIVO)

**

18.1%

30.0%

Centennial Communications   (NASDAQ:CYCL)

**

25.0%

16.5%

Sources: Motley Fool CAPS; Yahoo! Finance; Capital IQ, a division of Standard & Poor's; and wsj.com.

Bear in mind that this isn't a list of recommendations. Instead, I offer these stocks as candidates for further research.

Hardly a perfect list, I know. But TiVo, for all its faults, appears to be on its way to winning its case and a $94 million judgment against Dish Network. Interestingly, that $94 million applies to just one of more than 100 TiVo patents.

A lulu of a stock?
Even so, my top pick for today is one I've made before: lululemon athletica. Yes, I know it has a huge short interest, but hear me out.

lululemon doesn't get much love from our CAPS community because of, well, Crocs (Nasdaq: CROX  ) . All-Star Prodders recently put it this way: "Nonsense valuation for a retailer, very susceptible to their fad fizzling out a la Crocs."

He's referring to lululemon's seemingly outrageous 70 P/E ratio. I can appreciate that. Only a daredevil would invest in stocks that command unsustainable sky-high valuations. But is that really what we have here?

I'm not so sure. Certainly, lululemon's 0.76 PEG ratio -- based on next year's projected earnings -- suggests to me that (a) yoga is back, and (b) the stock is, at worst, reasonably priced. If so, it wouldn't be the first time the market has misunderstood a grower's potential. Google, for instance, traded for around 100 times earnings at its IPO in 2004. You know what has happened since.

And let's not forget lululemon's underlying business. Management has performed brilliantly in its efforts to deploy shareholder capital:

Metrics

FY 2007*

FY 2006

Return on invested capital

41.7%

44.4%

Return on equity

41.3%

23.4%

Source: Capital IQ, a division of Standard & Poor's; fiscal years ended on Feb. 3, 2008, and Jan. 31, 2007.

Nike and Under Armour (NYSE: UA  ) also produce excellent returns on invested capital. Yet both produce, at most, half what lululemon does. I can't ignore that disparity. Therefore, today, I'll be moving the stock from my CAPS watch list to my virtual portfolio.

But that's me. I'm more interested in what you think. Would you buy lululemon 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.

Amazon is a Stock Advisor selection, and Under Armour is a Rule Breakers recommendation. Try either of these market-beating services free for 30 days. There's no obligation to subscribe. The Motley Fool owns shares of Under Armour.

Fool contributor Tim Beyers, ranked 17,892 out of more than 100,000 participants in CAPS, is a regular writer for Rule Breakers. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. See Tim's portfolio and his latest blog commentary. The Motley Fool's disclosure policy is your portfolio's competitive advantage.


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