Last week we presented the investment criteria for this new study. Today we use some of our numerical criteria to make the first cut. First, here are all of our high-growth investment criteria (and remember, it's a work in progress), greatly condensed. The high-growth company must have:
-- Expanding new business opportunities.
-- Boundless opportunities for the company's existing business(es).
-- A growing relevance in the world, as measured by more media coverage, more strategic agreements, increasingly meaningful press releases, etc.
-- A very likely 17-year period of significant growth for the company itself, not just the industry (in other words, strong visibility).
-- Management that is willing to speak with us regularly.
-- Annual sales growth of at least 20%, or the promise to exceed that.
-- A sustainable advantage over competitors, and new innovations.
-- A self-financed business and cash of more than 1.5 times long-term debt (much like a Rule Maker).
-- Strong working capital and cash flow, along with a Cash King Margin of 20% or more and a Foolish Flow Ratio below 1.4, or the promise to exceed these numbers.
-- The higher the gross margin and return on invested capital, the better.
-- Annual expected earnings per share growth of at least 25% in the next five years or, if unprofitable now, a promise to soon exceed 25% annual earnings growth.
-- A market capitalization between $300 million and $50 billion.
On to the cuts!
To make the first ones, we use the earnings per share growth criteria, which has been increased from our previous "between 20% and 25%," to at least 25%. Why the increase?
We have a great list of companies, so we have the luxury of cutting some of the slower growers to offer ourselves a "cushion." I figure that a company with a higher growth rate from day one has a better chance of meeting our five-year goal (which is still 20% to 25% growth), and thus our later, overall growth goals, assuming it has a great business. So, an estimated 25% growth rate is the cut, even though 20% to 25% actual growth is the goal.
All of the following companies are cut from our study due to an estimated earnings growth rate that falls below 25%. Perhaps not incidentally, several of these companies also exceed our $50 billion market cap limit.
Companies Cut Due to EPS Growth Less than 25%
Market Cap ���5-Yr. EPS
Company (Ticker) ($ Billions)���Growth Est.*�
Telephone&Data Systems (AMEX: TDS) $7 24.7%
Teradyne (NYSE: TER) $10.3 24.6%
Chico's FAS (Nasdaq: CHCS) $0.624 24.2%
Texas Instruments (NYSE: TXN) $100 24.2%
Chiron (Nasdaq: CHIR)������ $8.5 24%
Nortel Networks (NYSE: NT)����� $217 24%
Catalina Marketing (NYSE: POS) $2.2 23.8%
Adaptive Broadband (Nasdaq: ADAP) $0.97 23.5%
Tetra Tech (Nasdaq: WATR)��������� $1 23.3%
Scientific-Atlanta (NYSE: SFA) $11 23%
Home Depot (NYSE: HD) $126 23%
Motorola (NYSE: MOT) $74 22.9%
Dollar General (NYSE: DG) $7 22.7%
Applied Biosystems (NYSE: PEB) $21 22.5%
Intuit (Nasdaq: INTU) $12 22.1%
Lowe's (NYSE: LOW) $19 ������� 21.6%
American Power Con. (Nasdaq: APCC) $4 21.5%
PeopleSoft (Nasdaq: PSFT) $9 21.5%
Tyco International (NYSE: TYC) $97 21.3%
Coldwater Creek (Nasdaq: CWTR) $0.304 21.2%
Elan Corp ADS (NYSE: ELN) $13 20.8%
Guidant (NYSE: GDT) $20 19%
Harley-Davidson (NYSE: HDI) $14 18.5%
Medtronic (NYSE: MDT) $60 18%
Enron (NYSE: ENE) $62 17%
Amgen (Nasdaq: AMGN) $75 17.2%
Walgreen Co. (NYSE: WAG) $35 16.8%
Alliance Capital (NYSE: AC) $10 16%
AFLAC (NYSE: AFL) $15 15.7%
American Capital (Nasdaq: ACAS) $0.59 15.2%
Hewlett-Packard (NYSE: HWP) $122 14.9%
Associates First Cap. (NYSE: AFS $28 14.7%
Carlisle (NYSE: CSL) $1.3 14.6%
General Electric (NYSE: GE) $581 14.4%
Citigroup (NYSE: C) $25 14.1%
SYSCO Corp. (NYSE: SYY) $14 13.8%
El Paso Energy (NYSE: EPG) $14 13.8%
Gillette (NYSE: G) $32 13.1%
McGraw-Hill (NYSE: MHP) $12 13%
London Pacific Group (NYSE: LDP) $1.4 13%
Procter & Gamble (NYSE: PG) $82 12.4%
Merck (NYSE: MRK) $155 12.3%
Quaker Chemical (NYSE: KWR) $0.148 12%
Aventis (NYSE: AVE) $55 9%
Duke Energy (NYSE: DUK) $30 8.8%
*The "EPS Growth Est." is the five-year average earnings per share growth estimate as compiled by First Call.Next, the following companies are all cut due to market capitalizations that exceed our $50 billion value limit. This is a list of recognized, great, growing companies. It hurts to see them go, but we're looking for something that hasn't grown in value so much yet. (That said, a reminder: If you have a compelling argument why any of these companies should stay in our study, just post it!)
Companies Cut Due to a Market Cap above $50 Billion ������������ � Market Cap ���5-Yr. EPS Company (Ticker) ������ ($ Billions) ��Growth Est. Cisco Systems (Nasdaq: CSCO $462 31.6% EMC Corp. (NYSE: EMC) $211 29.9% Nokia (NYSE: NOK) $200 28% America Online (NYSE: AOL) $128 48.4% Dell Computer (Nasdaq: DELL) $100 31.3% JDS Uniphase (Nasdaq: JDSU) $99 49% Corning (NYSE: GLW $91 27.4% WorldCom (Nasdaq: WCOM) $87 25.3% Yahoo! (Nasdaq: YHOO) $57 51% Broadcom (Nasdaq: BRCM) $51 48%These two cuts bring us to our first list of high-growth contenders! The first list of contender companies below is shown by the number of votes each received from the community. The stocks on the second list all received one vote and are listed by growth rate.
Drip Port's High-Growth Contenders
Market Cap ��5-Yr. EPS
Company (Ticker) ($ Billions)��Growth Est. ��
Paychex (Nasdaq: PAYX) $16 28.3%
Network Appliance (Nasdaq: NTAP) $35 56%
Ariba (Nasdaq: ARBA) $38 61%
SanDisk (Nasdaq: SNDK) $5 34.2%
Millennium Pharm. (Nasdaq: MLNM) $12 27%
Human Genome Sciences (Nasdaq: HGSI) $9 N/A
Listed by Growth Rate
Phone.com (Nasdaq: PHCM) $7 100%
USinternetworking (Nasdaq: USIX) $0.87 72.5%
NEXTLINK Commun. (Nasdaq: NXLK) $8 70%
InfoSpace (Nasdaq: INSP) $9 68%
Commerce One (Nasdaq: CMRC) $12 67.5%
eBay (Nasdaq: EBAY) $17 66.7%
Priceline.com (Nasdaq: PCLN) $4.8 64.3%
Marimba (Nasdaq: MRBA) $0.37 58.3%
Amazon.com (Nasdaq: AMZN) $15 57.7%
Redback Networks (Nasdaq: RBAK) $19 52.8%
Newport (Nasdaq: NEWP) $5 50%
Red Hat (Nasdaq: RHAT) $3.6 50%
Cree (Nasdaq: CREE) $4.4 47.5%
RF Micro Devices (Nasdaq: RFMD) $6.4 44%
Applied Micro Cir.(Nasdaq: AMCC $24 42.7%
Qiagen (NYSE: QGENF $6 42.5%
MedImmune (Nasdaq: MEDI) $15 41.8%
Vitesse Semiconductor (Nasdaq: VTSS) $15 41%
Check Point Software (Nasdaq: CHKP) $23 40.7%
PMC-Sierra (Nasdaq: PMCS) $34 40%
Mercury Interactive (Nasdaq: MERQ) $9.6 39.1%
Siebel Systems (Nasdaq: SEBL) $39 38.8%
Palm Inc (Nasdaq: PALM) $2 37.5%
Qualcomm (Nasdaq: QCOM) $47 36.8%
Ciena (Nasdaq: CIEN) $29 36.3%
Trex Company (NYSE: TWP) $0.55 35%
Identix (AMEX: IDX) $0.50 35%
Concord EFS (Nasdaq: CEFT) $7 34.5%
Gemstar-TV Guide Intl (Nasdaq: GMST) $16 33%
Wind River Systems (Nasdaq: WIND) $3.3 37%(NEW!)
Jabil Circuit (NYSE: JBL) $13 31.5%
Flextronics (Nasdaq: FLEX) $17 31.1%
Solectron (NYSE: SLR) $29 29.6%
ADC Telelcomunn. (Nasdaq: ADCT) $26 28.8%
Panera Bread Co (Nasdaq: PNRA) $0.196 28.3%
Knight Trading Group (Nasdaq: NITE $4 27.5%
Genentech (NYSE: DNA) $44 26.1%
Starbucks (Nasdaq: SBUX) $6.8 26%
Fastenal (Nasdaq: FAST) $2.3 25.6%
Adobe Systems (Nasdaq: ADBE) $18 25.2%(NEW!)
Krispy Kreme Doughnuts(Nasdaq: KREM) $1.1 25%
IXYS Corp. (Nasdaq: SYXI) $0.913 N/A
Nasdaq 100 (AMEX: QQQ) N/A ??
Next week, we'll begin to look at these more closely and continue cutting. At that time, we'll likely be helped by research from David (CutieDoodle) on the discussion board, who compiled key information on all our companies already! Thanks, David!However, dear readers, as we end today, you already have a few things to do, should you desire! First, go over the two lists of companies that have been cut and post your arguments for any company that you think should be added back to the study! This is important! On the Drip Companies discussion board, tell us why your company is an exceptional value and why it should remain with us despite it missing one or two criteria.
Secondly, look both at our list of cut companies and our list of contenders and point us to any great companies that we're missing from our study! Post the newly suggested companies on the board for our inclusion by noon ET on Monday, September 25. You can see how Fools did so for Adobe Systems (Nasdaq: ADBE) and Wind River Systems (Nasdaq: WIND) last week, and we added them to the list today.
And, finally, consider running your favorite companies through our investment criteria, as Shawn (sstackho) did in this excellent look at Concord EFS (Nasdaq: CEFT). Thanks, Shawn!
Here is the Drip Companies discussion board. Please make your arguments for any company that we cut today or suggest new companies to add by next Monday, September 25, noon ET. Fool on!
--Jeff Fischer, TMF Jeff on the discussion boards
