You might think companies are like sharks: They must keep moving to keep from dying. Perhaps that's the reason so many investors seek growth, having been inculcated to believe that if it ain't growing, then it must be dying. Of course, investors have also been regaled by great wealth derived from little companies that grew in a big way into big companies, a la Microsoft
But for every Microsoft and Cisco Systems, one can unearth a netherworld sardine-packed with the likes of Webvan, Savin Computers, and Pets.com.
Still, many companies do gain traction and grow -- at least, they grow the top line, which makes you wonder: Are exceptional top-line growers worthwhile investments? To which I answer: It depends. If the growth fails to produce bottom-line growth, then what's the point? Take the media sector, for example. Its growth has frustrated many investors over the years: The faster revenues have grown, the worse the shares have generally performed.
I'm uninterested in growth for growth's sake. I'm more interested in efficiency and effectiveness. If the company can grow the top line, great, as long as it can grow the bottom line at an equal or quicker pace. Anything else is simply empire-building.
Five for the road ... literally
Not everyone agrees. The following five companies have been exceptional top-line growers, though they have yet to follow through to achieve exceptional bottom-line results. Despite that fact, their shares have performed remarkably well this year, which I think presents a selling opportunity.
WCA Waste, a vertically integrated solid-waste company, should probably be given a pass, given its status as a relatively new small fry -- but I won't. WCA's revenues have more than tripled in the past five years to 2008's $208 million. Over the same period, the company has either operated at a loss, or with net income hovering between $2.5 million and $3 million. That said, its share price has more than doubled from 2009's lows, even though it continues to post losses.
One could argue that these companies are simply in their hurry-up-and-grow mode, and that they'll clean house once growth subsides. That could be the case, but their histories suggest otherwise, which is why I think investors should consider taking some of this year's windfall off the table or revisiting these stocks once they've proven they can better manage their growth.
Fool contributor Stephen Mauzy, CFA, owns no shares in the companies mentioned. He's the author of the upcoming book The Wealth Portfolio, available this fall. Microsoft is a Motley Fool Inside Value selection. The Fool has a disclosure policy.