3 Growth Stocks Ready to Launch

Can you stomach a growth portfolio?

Small-cap growth stocks are far more volatile than anything that's in the S&P 500 index, but it's worth your while to strengthen your stomach. Why? Well, don't you want to be like the man who bought Motorola when it was a tiny radio manufacturer back in 1955 and never sold? He multiplied his money many, many times over, and that one experience -- and others like it -- helped him become one of the best investors of all time.

But you didn't need to be investing in 1955 to profit from Motorola's amazing growth. If you had bought the stock as late as 1980 and held, through even the company's turbulent recent years, the investment would still have brought you a return of nearly 1,100%, turning $10,000 into $118,000.

Those types of returns are precisely why you should not only stomach growth stocks but make them a part of your portfolio today.

The growth king
The Motorola man I mentioned above is the famous Philip Fisher, and in 1958 he wrote Common Stocks and Uncommon Profits -- a timeless book for all investors. His greatest contribution to growth investing may be his 15 Points. Though they won't shield you from short-term volatility, these points will help you achieve incredible long-term returns.

Here's the short-short version ...

1. Great growth stocks must take advantage of a substantial market opportunity to profit. That means they will be both "fortunate and able." Of course, being fortunate and able requires many things, including an excellent industry position, competitive advantages, prudent uses of discretionary dollars, efficient models, and superior sales forces.
2. Great growth stocks must have a balanced and transparent management team. A potential investor must be able to look at a company's leadership and believe that it has integrity, an ability to handle distress, and an insightful vision for the future.
3. Great growth stocks must have outstanding accounting and disclosure policies. Anything less than excellence is unacceptable.

How do these qualities translate to significant shareholder return? Examine Fisher's investment in steel maker Nucor in the mid-1970s. This was a growth mover at the time that went from a relative pip-squeak to the second-largest American steel manufacturer by the time Fisher sold it.

Nucor embodied some of the very basic principles that Fisher espoused. For example, when many steel makers were concentrating on volume and turnout, Nucor focused on implementing new technologies into its production methods, making each of its plants smaller, more efficient, and most importantly, more profitable. And today, the company still looks like a little brother compared with massive conglomerates such as CVRD (NYSE: RIO).

But again, you didn't need to be Fisher to take advantage. Even if you had bought Nucor stock in 1990, long after the company's initial move, you would have a fat 2,593% return on your hands. That's a 20.1% annual return compared with the market's 8.6%.

The next wave
As a former analyst on the Motley Fool's Rule Breakers growth service, I am constantly on the prowl for the best growth stocks out there. So with an eye on Fisher's most important lessons, here are three growth stocks that I believe have tremendous potential:

As a trusted name in fund ratings and investment research, Morningstar is probably not a stock you'd consider primed for huge growth. But step back a second. I've added this stock to my own portfolio precisely because it is an extremely well managed business, throwing off tons of free cash every quarter, and is one that is growing at an incredible rate. Of all companies that cross my radar screen, I'd argue that Morningstar embodies each of Fisher's principles best. Years down the road, I imagine Morningstar challenging Moody's (NYSE: MCO) and Standard & Poor's for ratings dominance. In other words, I seriously doubt this will be a $3.4 billion business in five years.  

BE Aerospace has had a fairly rocky performance over the past year -- today shares hover around $40, despite reaching highs near $55 this winter. Yet I think a bright future is just over the horizon. As one of the premier providers of aircraft interiors, BE solicits business from all sorts, including Boeing's massive jumbo jets all the way down to smaller business jets. If you want a piece of global growth in air traffic, BE Aerospace is an excellent backdoor way in. Consumers are flying more than ever and I consider BE to be both "fortunate and able."

Atwood Oceanics is an offshore driller that currently operates eight deep-sea rigs with a ninth world-class rig coming on line this September. It's not nearly as big as competitors like Transocean (NYSE: RIG), but this company is well-diversified geographically and is running a very efficient operation comparatively. Atwood's rigs are booked long into the future and if you think that global demand for oil is falling off anytime soon, you may want to reexamine your logic. Though drilling is a historically cyclical operation, look to Atwood to remain a strong grower in years to come.

More where those came from
These are three of my favorite growth picks, and I look forward to seeing them flourish. Fisher's principles, which are elemental in my own approach, are also a big part of how David Gardner and his team research at Rule Breakers -- where growth is king.

If these principles agree with your style, then I advise you to try the service free for 30 days without obligation. We're thumping the market average right now by nearly 25 percentage points. You can see all of our research and recommendations immediately upon joining, and there is no obligation to subscribe.

This article was first published July 30, 2007. It has been updated.

Rule Breakers analyst Nick Kapur owns Morningstar. Morningstar, Moody's, and Atwood Oceanics are Stock Advisor recommendations. Moody's is also an Inside Value selection. The Motley Fool owns shares of Morningstar. The Fool has a disclosure policy.