Color to the Numbers: Top Small-Cap Growth Stocks

Financial websites have given investors more tools than ever to screen the markets for stock ideas. But those tools provide just the raw numbers -- not the stories behind them. What might look like the start of a trend could merely be a one-time blip. Let's enlist Motley Fool CAPS to color in the outlines these numbers create.

To find the cream of the crop of small-cap growth stocks that are showing healthy growth trends, we'll screen for stocks with:

  • Market cap between $100 million and $1 billion.
  • Estimated growth rate in earnings per share for the next five years of at least 25%.
  • Revenue growth estimates for the current fiscal year of at least 30%.

Then we'll tap the collective intelligence of our 85,000-plus CAPS investors to see whether these companies present real opportunities -- or whether they're priced beyond reasonable values.

Opinions with the numbers
Here's a sampling from the list of stocks our screen pulled up today.

Company

Estimated 5-Year
Growth Rate

CAPS Rank
(out of 5)

China Security & Surveillance Tech.
(NYSE:CSR)

28%

*****

On2 Technologies (AMEX:ONT)

35%

***

Origin Agritech (NASDAQ:SEED)

25%

***

Trina Solar (NYSE:TSL)

52%

**

NetSuite (NYSE:N)

25%

**

Bankrate (NASDAQ:RATE)

34%

**

Data from Yahoo! Finance. Star rank from CAPS. All data as of March 5.

Suite or sour?
Actually, the fact that on-demand business software provider NetSuite even showed up on our screen today is an anomaly -- the company's market capitalization is nearly $1.2 billion, but an error in Yahoo! Finance's data puts its value at only one-fourth that amount. One more reason not to trust numerical results from a screen! We'll look at the company as a slightly oversized small cap.

Showing that investors are still willing to party a little despite growing economic uncertainty, the systems software company ended 2007 with a robust Dutch auction IPO that saw shares soar even after bumping the offering price twice from the initial per-share range of $13 to $16. But just as all parties come to an end, many investors are now dealing with the hangover of a nearly 50% drop from NetSuite's peak of more than $40 per share.

In its first quarterly report as a public entity, NetSuite underwhelmed investors with revenue growth projections for 2008 somewhere north of 40%, and it estimates losses will continue through the year. The company is making progress, but noted it will need a bigger sales force to expand at a faster rate.

Many investors think NetSuite's software-as-a-service (SaaS) model for businesses is a harbinger of the future and that Oracle (Nasdaq: ORCL  ) CEO Larry Ellison's majority ownership of NetSuite positions it well. But a good portion of those in CAPS rating the company see near-term pain for the company's pricey shares. Of the 119 investors rating the company, 32 are betting shares will underperform the S&P going forward.

Safety in numbers
Investors share similar valuation concerns about the other two-star stocks making the screen -- Bankrate and Trina Solar

Highly-rated China Security is considered by some to be a stock on sale. The security company is seeing not only rapid sales growth, but consistent profitability without an extreme valuation.

The company recently reaffirmed strong guidance for first-quarter and full-year 2008 based on $100 million in new security contracts won in the final quarter of 2007. Despite the optimism, in a market where many companies are increasingly downgrading forward growth projections, China Security trades at a very palatable 8.7 times forward earnings. No wonder then that all 76 CAPS All-Stars rating it vote for shares to outperform the market in the future.

Let 85,000 investors be the judge
The collective wisdom of a huge pool of investors quickly adds color to a whitewashed page of numbers. But even with an entire community of qualified opinions acting as the judge, individual investors are still the jury and must perform their own research.

Want to see your favorite screen results run through the wringer in the CAPS community? It's free to tap the knowledge base, and your own opinion is very welcome in Motley Fool CAPS.


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