The Growth Stocks You Should Be Buying

We all know the legends of growth investing. But I submit that growth grabbers can learn as much from a single phrase from Warren Buffett -- the patron saint of value investing -- as they might from the writings of Lynch and Fisher. Quoth the Oracle of Omaha: "Be greedy when others are fearful."

I take this as a call to rebellion -- to invest where others won't. To zig as timid stock pickers zag. To order fish when the surrounding company chooses steak. And to buy stocks that cheapskates fear, such as Dendreon (NASDAQ:DNDN), because they're the best value stocks available.

Let the haters be your friends
We pursue these misunderstood multibaggers in the making at Motley Fool Rule Breakers under the guidance of Fool co-founder David Gardner. You can follow our market-beating moves with a risk-free trial to the service.

Or, if you prefer to invest on your own, there's Motley Fool CAPS, a 100% free stock-picking community whose 110,000-plus participating investors rate stocks on a scale of one to five stars. More than 5,500 rated companies are in the database right now. Any of them could be a 10-bagger in the making.

To me, the best of these are high growers -- expected to improve earnings by 15% a year over the next five -- that have been heavily shorted. Firms with 5% or more their available shares sold short can blast off like a rocket when the skeptics are proven wrong. 

Let's have the list
Here is today's list of growth stocks that others fear:

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.

We have some interesting choices here. I own shares of Lululemon today for its reasonable PEG ratio and extraordinary returns on equity and invested capital.

Panera Bread, meanwhile, recently upped its second-quarter guidance -- lending credence to Bill Barker's investing thesis from the July 2007 issue of Motley Fool Hidden Gems Pay Dirt.

"With a high P/E, Panera doesn't appeal to value investors at first glance, and in the midst of declining earnings, it's been abandoned by the growth investors who had driven the stock up," Bill wrote at the time. "To me, that spells opportunity."  Panera has soundly beaten the market since.

Too cheap to be a crock
Crocs -- whose management I view skeptically -- is cheaper today than Panera was when it joined the Pay Dirt scorecard the first time. And it features an eerily similar "growth meets value" combo that Bill Mann liked for the service.

"The shares have dropped from the top of the growth shelf to the value bin in the span of just six months. They're the nearest thing to untouchable,"  Bill wrote in his investment thesis. "And when no one would be caught dead owning a stock, maybe, just maybe there's an opportunity for dirt-loving investors to profit."

The stock has fallen another 59% since.

But is Crocs really that bad? Not according to investing kid wonder pencils2, a CAPS All-Star. "I'll take the chance here," he wrote in June. "Everyone I know who owns one of these things absolutely loves them, I don't see the company disappearing overnight. In the meantime, the financials aren't anything to scoff at."

What financials? How about a P/E of less than 5? Or a 35% return on invested capital? Only a small-f fool would call those numbers scoff-worthy.

But that's my take. I'm more interested in what you think. Would you buy Crocs 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 misunderstood multibaggers in the making.