The Best Way to Buy Growth

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You have to pay up for growth.

That old investing saw helps explain why Coca-Cola (NYSE: KO) paid $4.1 billion (or $180 million per SKU) for Glaceau parent Energy Brands, why Google (Nasdaq: GOOG) paid nearly $1.7 billion for YouTube (even when it had its own technology), why Microsoft (Nasdaq: MSFT) paid $6 billion (or 100 times earnings) for aQuantive, and why Google, Microsoft, and Yahoo! (Nasdaq: YHOO) have been embroiled in a bidding war for Facebook that may now value the social networking site at $10 billion (reportedly 333 times earnings).

To put that number in perspective, when Yahoo! was looking to buy Facebook for $1 billion last year, many analysts believed it was overbidding.

Our spacious glass house
As much fun as it is to gasp at what big companies are willing to spend to chase returns, it's important to remember that we little guys aren't immune from the same desire (read: greed) to succeed.

According to Yahoo! Finance, for example, the two stocks with the most bullish community sentiment last week were Millennium Cell (Nasdaq: MCEL) and Sonus Pharmaceuticals (Nasdaq: SNUS) -- two penny stocks that are destroying shareholder value in the hopes of hitting a home run in hydrogen batteries and oncology drugs, respectively.

Will it happen? Probably not. Is $0.69 too much to pay for a company that lost $0.61 per share over the past year? Yes. Should Yahoo! Finance be unwittingly hyping these penny stocks on its main page? Definitely not.

But the reason people are "bullish" on these names is simply because they're hoping the best-case scenario here comes true. Many investors approach the stock market the same way they do a casino: Hoping for one big winner. Hope aside, this is among the surest ways to destroy your investment dollars.

The dangers of growth
That last point is an important point to remember, particularly at a time when most every credible analyst -- including our team at Motley Fool Global Gains -- is extolling the virtues of investing abroad. Because there are two truths about investing in foreign issues that make doing so both necessary and nauseating:

1. Economies in Asia, Europe, and Latin America are growing at much faster rates than the U.S. economy.
2. Markets in these countries have been on a tear, and the valuations in many cases look extremely tenuous.

In other words, while you should not be plowing your dollars into Chinese and Indian stocks with reckless abandon, you should be looking closely at companies that can give you the growth these economies have to offer without forcing you to pay a nosebleed multiple.

Welcome to Utopia
American Oriental Bioengineering (NYSE: AOB), for example, sells traditional medicines in China. It boasts a 25% free cash flow margin and a 23% return on equity, and trades for 23 times earnings. While that looks expensive compared with American stocks, it looks a lot cheaper when you consider the company doubled revenue and earnings last year.

That said, there are some real execution and corporate governance risks associated with investing in Chinese stocks generally and in American Oriental Bioengineering specifically. But that's why any research into foreign stocks must be both careful and complete.

At Motley Fool Global Gains, we focus on doing that research, visiting the companies we cover and finding foreign stocks that offer great potential at a great price. To see the names we're recommending today, click here to join Global Gains free for 30 days. There is no obligation to subscribe.

Tim Hanson does not own shares of any company mentioned. Microsoft and Coca-Cola are Motley Fool Inside Value recommendations. Yahoo! is a Stock Advisor pick. The Fool's disclosure policy owns LaDainian Tomlinson in its fantasy league and dislikes what Norv Tuner has done to the Chargers.