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 gorgeousness, 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 more than 140,000 investors, making it 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 each grew its net profit per share by an average of 15% or more per year over the past three years. (You can run the screen for yourself). Let's go ahead and meet our contestants.
The doubling of earnings per share that Netflix
How did the company do this? Easy: It invented DVD rental through the mail. Despite the subsequent arrival of competitors such as Blockbuster, Netflix now claims 9.4 million of the estimated 12 million DVD-through-the-mail subscribers.
Not only has this nascent industry shown continued strong growth, but the new twist of offering movie rentals via the Internet could also help Netflix keep up a significant growth pace.
Denim has been at the heart of many very successful retailers, including Gap
Buckle sells trendy clothing to the 15-to-27-year-old crowd through nearly 400 retail stores. More than 70% of the company's sales come from brand names such as Hurley, Fossil, and Ed Hardy.
Growth has picked up significantly for the company in recent years; the top line has shown some life, and margins have expanded significantly. Over the past year, Buckle's revenue has jumped more than 20%.
It's hard not to show significant growth when you're a commodity producer, and the price of your commodity of choice goes through the roof.
Like major competitor Mosaic
For the quarter ended in June, PotashCorp actually saw its average selling price per ton of potash increase 15%. That doesn't mean demand has kept up. Total potash sales for the quarter fell more than 80% from the prior year. Will demand return? Let's hope so -- PotashCorp's future growth depends on it.
I know what you're thinking. Strapped consumers and slow economic growth make it crazy even to think about a fancy-purse slinger like Coach
There's no doubt that the near-100% growth in Coach's revenue between 2005 and 2008 was interrupted by the recession. For the company's fiscal year 2009 -- which ended in June -- total sales crept up just 2%, and net income (excluding "unusual items") fell 16%. The strength in the top line, however, speaks to the power of Coach's brand.
With foreign countries including China representing a significant part of Coach's strategy, continued growth could be back in the bag in relatively short order.
Public Service Enterprise Group
The epitome of boring, PSEG
How does a stodgy utility do that? During 2007 the company's power unit -- its largest business -- signed a contract that significantly raised what the company charges for its electric generation services. While we can't expect that PSEG will get this kind of bump every year, we can expect that it will be able to consistently put contracts in place that will let it stay comfortably profitable.
The envelope please ...
The voting is in, and CAPS community members have shared their opinions. With a lowly two-star rating, Netflix quickly gets voted off the island. CAPS members seem to be concerned about both the stock's valuation and the potential that the company will face cutthroat competition as movie-watching moves online.
Both Buckle and Coach have gotten somewhat better three-star ratings, but they weren't able to beat retail's bad rap.
Despite the huge drop in potash demand, the CAPS community is pretty positive on four-star PotashCorp. Multiple members have noted that while demand may be soft, farmers can't hold off indefinitely on purchasing new fertilizer supplies -- at least, not if they hope to continue to have healthy harvests. Some members have also highlighted the high barriers to entry in the potash business.
I'm a fan of electric companies, they won't shoot the lights out with profits because there are limits to what they can charge, but they are a safe bet in the midst of all the environmental talk and cutting back on oil consumption and pollution, I think they will benefit as energy consumption is pointed in other directions
Now go vote!
Do you think that PSEG has what it takes to be America's next top growth stock? Head over to CAPS and let the rest of the community know.
Fool contributor Matt Koppenheffer owns shares of Bank of America, but does not own shares of any of the other companies mentioned in this article. 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. The Fool's disclosure policy would surely win America's Next Top Disclosure Policy, but for some reason there's no such contest. Go figure.