America's Next Top Growth Stock

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Growth stocks are the beauties of the stock world, plain and simple. They're exciting, they usually have good stories, and they can make you a lot of money. Dell (Nasdaq: DELL  ) may have had some tough years recently, but if you had invested in it in the '90s when it was still a fast grower, you would have scored some obscene returns.

But for all their beauty, growth stocks are also the prima donnas of the market. They can be erratic, they don't always live up to their billing, and they tend to attract a shareholder base that's ready and willing to run at the first signs of slowdown. For those reasons, caution is certainly in order when you enter the world of growth investing.

Fortunately, The Motley Fool's CAPS service brings us the collective intelligence of a community of more than 115,000 investors, and it’s a great resource for separating the Jessica Albas from the Frodo Bagginses. Each of the stocks competing for this week's top spot has a market of at least $100 million and grew its net profit by at least 20% over the past year. So let's go ahead and meet our contestants.

CME Group
If you're trading options or futures based on anything from equity indexes to U.S. weather, there's a good chance that CME Group (NYSE: CME  ) is somehow involved. CME is a holding company that owns the Chicago Mercantile Exchange and the Chicago Board of Trade, and the combined trading volume of the two was more than 2.2 billion contracts in 2007. And the company is getting ready to improve its position in the commodity futures market with the acquisition of NYMEX Holdings.

Annaly Capital Management
Have you ever wished you could come up with a scheme that would allow you to skim just a little bit of money off of a huge sum and keep it for yourself? Meet Annaly Capital Management (NYSE: NLY  ) . Now, while I wouldn't quite refer to Annaly's business as a "scheme," what they do isn't that far off from what I described. The company uses a few billion in shareholders’ equity, along with many billions in debt, to purchase truckloads of high-quality mortgage paper. Because it focuses on high-quality mortgage paper, it earns only a thin interest margin, but even a thin margin on billions of dollars is good money.

Sigma Designs
If a standard integrated circuit is a foot soldier, then you could consider a system on a chip (SoC) a Navy SEAL. These juiced-up chips are built to be a one-stop shop when it comes to adding functionality to a new gadget. So what's so cool about Sigma Designs (Nasdaq: SIGM  ) ? Well, it makes SoCs for hot, growing markets like IPTV, Blu-ray players, HDTVs, and portable media players. Though it took a long time for the company to start producing consistent profitability, growth over the past few years has been sky-high.

With $1.4 trillion in assets under management (AUM), BlackRock (NYSE: BLK  ) is to the asset management industry what Andre the Giant was to the WWF -- in other words, a beast. Historically, the company was focused primarily on the lower-margin fixed-income portion of the market. Over the past couple of years, though, it has cranked up its diversification and supercharged its growth by acquiring Merrill Lynch's (NYSE: MER  ) investment management business, the fund of funds business from Quellos Group, and SSRM Holdings from MetLife. Combined, these acquisitions added $661 billion in AUM and turned the company’s equity funds business from an afterthought to a third of its assets.

As a former Internet darling, Ciena's (Nasdaq: CIEN  ) stock has seen incredible highs. Of course, the business was arguably ahead of its time when it was touching those highs, and it only managed to turn a profit because telecoms were overspending on capacity. Some years and billions of dollars of losses later, Ciena is showing some real life again, supplying networking equipment for some of the growing areas of the communications market. Not only is it showing a solid profit these days, but it's also been growing at a steady clip.

The envelope, please ...
Turning to the CAPS community for a verdict, it's clear that BlackRock and Annaly -- which have landed two-star ratings -- just don't make the cut. Ciena carries a slightly better three-star rating, but it just wasn’t enough to be in contention for the top spot. Which leaves us with CME Group and Sigma Designs.

Though CAPS members definitely like CME and its business, its four-star rating just wasn't enough to keep it from getting edged out by Sigma. Sigma has been rated by 1,447 CAPS members, and an impressive 98% of those ratings have been outperform. CAPS member Carbarns is one of those bulls and chimed in earlier this month with:

IPTV is just getting a foothold in the consumer's vocabulary. Watching YouTube and social networking media content will blow this industry wide open and Sigma is poised to exploit it if they play their cards right. Watch to see in their next quarterly report if they don't offer more forward looking financial comments.

Place your votes!
Do you think Sigma Designs has what it takes to be America's next top growth stock? Head over to CAPS and let the rest of the community know what you think.

More CAPS Foolishness:

Sigma Designs is a Motley Fool Hidden Gems Pay Dirt and a Rule Breakers recommendation. Annaly Capital Management is a Motley Fool Income Investor selection. Dell is a Motley Fool Inside Value pick. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. The Fool’s disclosure policy would surely win America's Next Top Disclosure Policy, but for some reason there's no such contest.

Read/Post Comments (2) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 22, 2008, at 4:54 PM, geekdiver wrote:

    Annaly? You're kidding, right?

    Yeah, you got what they do right.

    Now you do know that Freddie and Fannie have 10% of their credit book in ALT-A liar loans, option ARMs, subprime and interest-only (speculator loans), right? And, this is what Annaly buys, right?

    If you DID know that, how could you recommend "levering up" on this so-called "good paper"?

    If you DIDN'T know that, how can you recommend the company?

    One more thing - what happens when (not if) Freddie and Fannie are "recapitalized" by the govenrment if there is ANY haircut applied to that paper.

    Multiply by the leverage ratio, and that's the loss Annaly takes.

    It would be trivially easy for Annaly to be bankrupted instantaneously by this event, even if the bondholders themselves took (comparatively) small losses.

    Disclosure: Holding a speculative PUT position on NLY that was cheap to buy and will be a 20-bagger if they go "boom".

  • Report this Comment On August 22, 2008, at 7:25 PM, TMFKopp wrote:

    Thanks for the comment geekdiver. I assume that what you're referring to is the description of Annaly's business. If you read through the rest of the article, you'll notice that both Annaly and BlackRock have been very poorly rated on CAPS and on that basis this article isn't recommending either stock.

    Apparently, many CAPS members agree with your take on Annaly.

    Hope this clears up your confusion.

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Related Tickers

10/21/2016 11:08 AM
BLK $346.55 Down -2.62 -0.75%
BlackRock CAPS Rating: ****
CIEN $19.81 Down -0.32 -1.57%
Ciena CAPS Rating: **
DELL.DL $0.00 Down +0.00 +0.00%
Dell CAPS Rating: *
MER.DL2 $11.64 Down +0.00 +0.00%
Merrill Lynch & Co… CAPS Rating: *
NLY $10.09 Down -0.04 -0.39%
Annaly Capital Man… CAPS Rating: ****
SIGM $7.50 Down -0.12 -1.57%
Sigma Designs CAPS Rating: **