5 Top Tweeners

If you've ever sought to get seriously rich from stocks, then you've owned a tweener.

Neither up-and-coming superstars nor dominant veterans, tweeners are poised precariously in between. They're not as hot as they once were, and they're vulnerable both to young upstarts and old stalwarts. But they've honed their skills enough to remain a force to be reckoned with.

The stock market has plenty of tweeners. They'll either create billion-dollar fortunes as they come to dominate industries, as Cisco and Microsoft have, or they'll be destroyed in the process, as Gateway almost was. That's the problem -- investing in tweeners can be dangerous and exceptionally profitable. By picking his winners well, David Gardner produced nine years of 20% average returns hunting for misunderstood multibaggers in the making. His team at Motley Fool Rule Breakers continues the tradition today.

Let's have the list
You, too, can join in the effort, courtesy of Motley Fool CAPS. Each week, we'll use the database to find three-star stocks that are expected to boost earnings by at least 15% annually over the next five years. Here are the latest contenders:

Company

CAPS Rating (out of 5)

5-Year Growth Estimate

Illumina (NASDAQ:ILMN)

***

28.5%

Phoenix Technologies (NASDAQ:PTEC)

***

27.5%

Starbucks (NASDAQ:SBUX)

***

18.5%

Greenhill (NYSE:GHL)

***

17.7%

MF Global (NYSE:MF)

***

17.5%

Sources: Motley Fool CAPS, Yahoo! Finance

Bear in mind that this isn't a list of recommendations -- merely candidates for further research.

Starbucks frequently tempts me with its coffee. As an investor, I'm tempted by its valuation, as expressed in a 0.95 current-calendar-year PEG ratio and 0.82 PEG for 2009. So why don't I own shares? Because growth has become a lot less predictable than in years past, and that unpredictability calls into question the accuracy of those same PEG ratios.

What's that? A scandal? Buy!
That's partially why my top pick for today is MF Global, a derivatives specialist that Foolish colleague Nate Parmelee named a Global Gains pick last September. His rationale at the time:

The robust growth in MF Global's business shines through on its income statement, as does the scale the company has gained on its fixed expenses. During the past few years, trading volumes have doubled. This has allowed MF Global to post double-digit revenue growth each year while more than doubling its profits. Much of the growth has been organic, but the company has benefited from acquisitions, particularly, the purchase of Refco Financial assets.

Fast-forward to last week. A rogue trader cost the company more than $141 million in unauthorized trades when internal safeguards failed. MF Global has since fired the trader, but the damage is done: 2008 earnings could be cut in half.

Management doesn't seem to mind. Six of the company's executive officers spent $3 million to acquire stock on Friday at a nearly 52-week low.

Good move. There's no evidence that this scandal will materially affect the growth of the core derivatives business. And if management puts in tighter internal controls moving forward, there's every reason to believe the stock is worth exactly as much as Nate estimated six months ago -- roughly double Friday's close.

But that's my take. What about you? Would you buy MF Global at current prices? Let us know by signing up for CAPS now. It's 100% free to participate.

See you back here next week for five more top tweeners.


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