This Simple Strategy Has Been on Fire

"We should think / we can get / by with a / setback or two" -- From "Fortitude" by A.R. Ammons (1994)

Having a square-jawed attitude about your best stock ideas can help investors beat the market in the long run. If you avoid having a short-term mind-set, you can endure a few trials along the way. That's what growth investors have discovered over the past several years -- and I think that growth stocks will continue to be good performers with staying power.

Turning growth into gold
To show just how well growth has done lately, I went back to 2005 to screen for stocks that met two simple criteria: 20% annual growth in sales and earnings over the preceding three years. I found more than 150 companies that cleared these hurdles; nearly half of them came from the basic materials industry, which had been riding a global wave of heavy construction and infrastructure investments at the time.

That wave is now largely a distant memory, but those businesses have still put together an impressive performance over the past five years. When I looked back at the 50 companies with the fastest-growing sales through my backtesting tool, I found that an equally weighted portfolio of those stocks would have returned about 50% since the end of 2005, compared to roughly flat performance for the S&P 500.

What worked and what didn't
Of course, not every stock rose. Duds like Chico's FAS (NYSE: CHS) and Valero Energy (NYSE: VLO) lost between 50% and 70% of their value since the end of 2005. But those losses were more than offset by star performers such as Mechel (NYSE: MTL) and Apple (Nasdaq: AAPL), both of which more than tripled -- and only 13 of the 50 candidates failed to beat the S&P. Even in the face of a global meltdown, many of those stocks came through.

But those gains didn't come without bumps along the way. Even Apple dropped as much as 30% during 2006 but recovered with gusto as the iPhone's success blew away every reasonable expectation. Steel miner Mechel soared even higher and then fell much harder before the past year's rally.

Overall, high-growth stocks have held up pretty well in recent years. Could using the same simple criteria give us good stock ideas today?

Fast-forward to today
Looking at the same metrics, my screen produces a smaller haul of just 50 stocks. That makes sense; after all, 2008 was not kind to corporate America.

Here's a handful of the most promising tickers I found in the real-time rundown:

Growth data taken from Capital IQ, a division of Standard & Poor's.
CAGR = compound annual growth rate.

Yep, Apple is back -- one of only eight repeat contenders -- and most of my readers believe that it's still the best investment on the market. Even though I disagree, I can't deny that its performance in recent years is extraordinary. VMware and salesforce both tap into the cloud-computing trend, and I believe that the best is still far ahead for that sector. CVS has applied the growth-by-acquisition strategy brilliantly; there's a lot to like here besides the record of proven growth.

What's next?
Of course, just because growth stocks did well from 2005 until now doesn't mean that they'll continue to do so. Value investing took a hit over the past five years, as much-loved financial stocks cratered, pulling many value investors' returns along with them. Yet value and growth tend to cycle back and forth in both popularity and returns -- so it may be time for value to shine once more.

But if you're investing for the long haul, I think strong growth stocks can give you long-term performance that will outperform the overall market. Some companies will flame out, but quality businesses and management teams will come through for you more often than not.