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 at a split-adjusted price of $3.24 a share in 1997. He's up about 2,400% 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 to the service. Or, if you prefer to pick your own stocks, there's Motley Fool CAPS, a 100% free stock-picking community whose 105,000-plus participating investors rate stocks on a scale of one to five stars. More than 5,700 rated companies are in the database right now.

How can this help you? Each week, we'll use CAPS to 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
(5 max)

Short Interest

5-Year Growth Estimate

Lifeway Foods (Nasdaq: LWAY  )

**

17.2%

25.0%

NVE (Nasdaq: NVEC  )

**

8.3%

25.0%

Abiomed (Nasdaq: ABMD  )

*

11.3%

22.3%

Texas Roadhouse (Nasdaq: TXRH  )

**

27.2%

20.2%

Old Dominion Freight (Nasdaq: ODFL  )

**

15.6%

15.5%

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. I offer these stocks as candidates for further research.

We have some interesting choices here. Trucker Old Dominion Freight Lines and its 1.00 PEG ratio based on 2008 earnings estimates looks reasonably priced. I also like its improving balance sheet and decent returns on equity and invested capital.

I'm less enthused about Lifeway Foods, whose 1.76 PEG suggests anything but a bargain, and which is facing sanctions from the Food and Drug Administration. Hardly terminal, but not good, either.

You don't mess with the Texas Roadhouse
My favorite this week is a restaurant that's almost always crowded: Texas Roadhouse. (Seriously, I've never seen an empty parking lot at my local store.)

But, if the numbers are to be believed, what I'm seeing is a mirage. Same-store sales declined 1.5% in the fourth quarter and 1.2% in Q1. As Foolish colleague Rick Munarriz put it in February: "Until comps turn positive, expect a little more fumbling as 2008 wears on."

Perhaps that's why casual dining peers Darden (NYSE: DRI  ) and Brinker International (NYSE: EAT  ) are beating the market while Texas Roadhouse is lagging. I'd prefer to see the eatery tracking closer to its competitors.

Even so, I like management's recipe for capital allocation in the face of rapidly rising costs:

Metrics

TTM*

2007

2006

2005

Return on invested capital

10.1%

10.2%

11.7%

13.8%

Gross margin

35.5%

35.7%

36.7%

37.1%

*Trailing 12 months.
Source: Capital IQ, a division of Standard & Poor's.

Good? No. But I can see how, given the rotten economy, those numbers could be a lot worse. As CAPS investor morgan628 wrote recently:

2008 is not going to be a great year for the restaurant industry as a whole. However, Texas Roadhouse is a growing (they plan to add another 30 restaurants in 2008), full service, casual dining chain. Even though they franchise restaurant operations, franchising is not the primary source of growth. In fact they have the right to buy back 62 of the current franchise operations.

Of course, that's just one Fool's take. I'm more interested in what you think. Would you buy Texas Roadhouse 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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Tim Beyers, who is ranked 17,764 out of more than 105,000 participants in CAPS, is a regular contributor to Fool.com and also writes for Rule Breakers. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. Click here for Tim's portfolio and here for his latest blog commentary. The Motley Fool's disclosure policy is your portfolio's competitive advantage.


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