The Growth Stocks You Should Be Buying

We all know the legends of growth investing. But I submit that growth grabbers can learn as much from a single phrase from Warren Buffett -- the patron saint of value investing -- as they might from the writings of Lynch and Fisher. It is:

Be greedy when others are fearful.

I take this as a call to rebellion -- to invest where others won't. To zig as timid stock pickers zag. To order fish when the surrounding company chooses steak. And to buy stocks that cheapskates fear, such as Apple (Nasdaq: AAPL  ) , because they're the best value stocks available.

Let the haters be your friends
We pursue these misunderstood multibaggers in the making at Motley Fool Rule Breakers, under the guidance of Fool co-founder David Gardner. You can follow our market-beating moves with a risk-free trial to the service.

Or, if you prefer to invest on your own, there's Motley Fool CAPS, a 100% free stock-picking community whose 110,000-plus participating investors rate stocks on a scale of one to five stars. More than 5,500 rated stocks are in the database right now. Any of them could be the next great growth stock.

To me, the best of these are high growers -- expected to improve earnings by 15% a year over the next five years -- that have been heavily shorted. Firms with 5% or more of their available shares sold short can blast off like a rocket when the skeptics are proven wrong.

Let's have the list
Here is today's list of growth stocks that others fear:

Company

CAPS Rating (out of 5)

Short Interest

5-Year Growth Estimate

Green Mountain Coffee (Nasdaq: GMCR  )

**

37.2%

40%

STEC (Nasdaq: STEC  )

**

15.9%

32.7%

AirTran Holdings (NYSE: AAI  )

*

22.7%

30%

ArthroCare (Nasdaq: ARTC  )

*

61.7%

25.4%

Chemed (NYSE: CHE  )

**

11.1%

15%

Sources: Motley Fool CAPS; Yahoo! Finance; Capital IQ, a division of Standard & Poor's; and wsj.com.

Bear in mind that this isn't a list of recommendations. Instead, I offer these stocks as candidates for further research.

We've got some interesting choices here. Surgical helper ArthroCare has been one of the best small-cap companies of the past several years.

By contrast, AirTran Holdings has been grounded alongside the rest of the airline industry. Record oil prices are at least partly to blame. Even so, AirTran is zigging as its peers are zagging by adding flights to vacation spots -- exactly the sort of strategic bet we rebel investors like to see.

The aroma of robust returns
My favorite today, though, is Green Mountain Coffee Rosters, which has more than tripled for me in CAPS. (And it’s done much more than that for early investors.) I believe it will continue to beat the market over the next three to five years.

Green Mountain is a beanery, which makes it more like Peet's Coffee than Starbucks (Nasdaq: SBUX  ) . It's also a leader in what's called "Fair Trade" coffee and, thereby, trumps Starbucks in social responsibility. Peet's has a similar flavor, but is the slower grower and, on a PEG basis, the more expensive stock.

Detractors such as CAPS investor southseacapital suggest that Green Mountain Coffee has no moat. "I don't see why any company can't do what they do over the long run," our Fool wrote two weeks ago.

That may be. But there's more than a mountain of beans behind this business, as CAPS All-Star likestofocus explained in February. Quoting:

AOL laid the groundwork for Yahoo!, which did the same for Google.

Now in coffee-land, Mr. Coffee laid the ground work for the masses, Starbucks brought better, hipper coffee to the same masses, now [Green Mountain Coffee Roasters] and its Keurig is doing the same thing to Starbucks that Google did to Yahoo!. Better, faster, cheaper coffee than Starbucks and you can brew it at home or pick it up at [McDonald's], if you are in [New England].

I'll add that, with a market cap just north of $1 billion, it'll be years (decades?) before Green Mountain Coffee reaches its potential.

But that's my take. I'm more interested in what you think. Would you buy Green Mountain Coffee at today's prices? Let us know by signing up for CAPS today. It's 100% free to participate.

See you back here next week for five more misunderstood multibaggers in the making.

Apple and Starbucks are Stock Advisor selections. Starbucks is also an Inside Value pick. Try either of these market-beating services free for 30 days. There's no obligation to subscribe.

Tim Beyers, who is ranked 18,403 out of more than 110,000 participants in CAPS, is a regular contributor to Fool.com and a member of the Rule Breakers team. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. The Motley Fool owns shares of Starbucks. Its disclosure policy is your portfolio's competitive advantage.


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