America's Next Top Growth Stock

Growth stocks are the beauties of the stock world, plain and simple. They're exciting, they have good stories, and they can make you a lot of money.

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 170,000 investors and is a great resource for separating the Jessica Albas from the Jabba the Hutts. Each of the stocks competing for this week's top spot has a market cap of at least $100 million and grew its earnings per share by an average of 15% or more per year over the past three years. So let's go ahead and meet our contestants.

Company

3-Year EPS Growth Rate

Trailing Price-to-Earnings Ratio

CAPS Rating
(out of 5)

STEC (Nasdaq: STEC  ) 104% 18.7 ***
Baidu (Nasdaq: BIDU  ) 78% 78.7 **
New York Community Bancorp (NYSE: NYB  ) 33% 12.6 *****
Cliffs Natural Resources (NYSE: CLF  ) 32% 9.3 ****
Mindray Medical (NYSE: MR  ) 17% 22.0 ***

Source: Yahoo! Finance; Capital IQ, a Standard and Poor's company; and CAPS as of July 1.

Growth without good looks
Chinese stocks in general have seen better days. From a big-picture view, many investors are concerned with the Chinese economy and its ability to continue to grow and manage that breakneck growth without getting crippled by inflation. At the same time, there has been good reason for growing cynicism of Chinese stocks as we've watched a seemingly endless parade of Chinese stocks face halts and delistings as they've come under scrutiny for financial shenanigans. A-Power Energy (Nasdaq: APWR  ) is just one of the most recent -- its shares were halted by the Nasdaq last week and it's lost its auditor, two independent directors, and its CFO. Even stocks like Renren (Nasdaq: RENN  ) -- deemed "China's Facebook" -- which should be exciting investors aren't. Renren's stock is down significantly since its May IPO.

But with a P/E of darn near 80, none of this seems to apply to Baidu.

My fellow Fool and Global Gains advisor Tim Hanson recently did an about-face on Baidu, admitting that his previous skepticism on the stock was misplaced. He thinks it's very well-positioned in China and has room for lots of growth ahead. However, he still isn't quite convinced that it's a buy at today's price, and CAPS members seem to be on the same page.

While Baidu's two-star rating suggests that investors should stay on the sidelines, the CAPS community is on the fence when it comes to STEC and Mindray Medical. With STEC, it's important to note that the unbelievable growth has been largely the result of a cyclical bounce-back that has drastically boosted the company's revenue and gross margins. Looking ahead, the 17.5% long-term growth estimates that analysts have set make the stock's price tag look significantly less mouthwatering.

Mindray's growth, on the other hand, has been more secular, and analysts see that growth continuing. Long-term estimates peg the company's future growth rate at 17.2% per year. But with an earnings multiple even higher than STEC's, it shouldn't be too surprising that CAPS members are lukewarm on this stock as well.

Strutting their stuff
While the stocks above haven't been able to sufficiently inspire CAPS members, Cliffs Natural Resources has.

Remember what I said about the challenges to China's growth? Well here's the thing: Not everybody buys that. While there are concerns that China could face growth challenges, there's also good reason to believe that it will continue to charge ahead, along with other growthy countries like Brazil and India.

And who benefits from broad-based economic growth like that? A lot of companies, but a major producer of iron ore and metallurgical coal like Cliffs is a darn good bet. The company has a sound balance sheet and delivers enviable returns on equity and capital, and the stock's earnings multiple certainly looks attractive. On the flip side, the company's margins have recently been above historical norms, and if that proves short-lived, the apparent cheapness of the stock may as well.

Although CAPS members are pretty fond of Cliffs, it just didn't have what it takes to top this week's top growth stock, New York Community Bank.

I have a pretty good idea what you're thinking: "A bank? @#$%!!!" But let's be clear, this isn't Citigroup playing around with derivatives and other massively destructive esoteric financial products. New York Community Bank is a pretty good model for what many investors lovingly refer to as a "boring bank." Most of its loans are on apartment buildings and are based on the cash flow that the owner receives from rent.

I've expressed concern in the past over the fact that the bank hasn't significantly bumped up its allowance for loan losses as its nonperforming loans have soared, and I'm still not quite comfortable with that. However, investors who trust the judgment of management may be able to sleep easily despite that. The fact the stock pays a healthy 6.5% dividend may help as well.

As for growth, the bank has shown a definite willingness to be opportunistic by jumping on Federal Deposit Insurance Corp.-backed deals to buy the assets of a couple of banks that went belly-up. Could there be more of that ahead? It wouldn't shock me one bit.

Now go vote!
Do you think New York Community Bank 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.

Motley Fool newsletter services have recommended buying shares of Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out the stocks he's keeping an eye on by visiting his CAPS portfolio, or you can connect with him on Twitter @KoppTheFool or Facebook. 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 (3) | Recommend This Article (7)

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 July 06, 2011, at 11:15 AM, Rennrunn wrote:

    I don't understand the negativity the author still has towards renn. It posted good earnings year over year and still continues to project high net profits over the next few quarters.

    The stock still continues to climb up on valuation yet the author is still telling us to short the stock? What is the motive?

    Renn has more than just a facebook site. It has nuomi.com for local deals like a groupon site, has jinguei.com a professional business site and it has renn games to sell online virtual items.

    I understand the author's disdain for this stock but why try to bring down a stock that has better valuation then the companies listed above?

  • Report this Comment On July 06, 2011, at 9:45 PM, TheBeave250 wrote:

    Nowhere in this article does Mr. Koppenheffer recommend shorting RENN. He is simply describing general investor sentiment toward Chinese stocks and using RENN as an example.

  • Report this Comment On July 07, 2011, at 11:25 AM, TMFKopp wrote:

    @TheBeave250

    100% correct, thanks.

    @Rennrunn

    To reiterate, I'm not suggesting shorting RENN here. The reference was meant to show that investors are having a lot of trouble right now getting excited about Chinese stocks.

    For more of my thoughts specifically on RENN, check out: http://www.fool.com/investing/international/2011/07/05/the-n...

    Matt

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