I love a great growth stock as much as the next stock junkie -- but a Foolish growth company like Pegasystems (Nasdaq: PEGA) is even better. Companies growing Foolishly create value even as they expand. That means you can jump into them today without waiting for a mishap to create opportunity.
Why isn’t growth enough? Let’s say I start a business that earns 10% returns on capital. Unfortunately, it cost me 12% to get the capital I needed to get my business up and running. That means my business doesn't generate enough of a return to pay back my investors. The more I grow, the further into the hole I sink. That’s not very Foolish.
Pegasystems has produced Foolish growth for some time now. Its return on invested capital (ROIC) remains greater than 15%; most companies' cost of capital lingers between 8% and 12%. In short, Pegasystems is not only creating value, but also growing more quickly than the competition. That Foolish growth has lead to market-beating returns, as shown in the table below:
|
Company |
5-Year Sales Growth |
ROIC |
5-Year Return |
5-Year Return S&P 500 |
|---|---|---|---|---|
|
Pegasystems |
23.7% |
15.5% |
248.1% |
-4.2% |
|
Fair Isaac (Nasdaq: FICO) |
-5.2% |
10.2% |
-41.6% |
-4.2% |
|
Tibco Software (Nasdaq: TIBX) |
9.1% |
9.6% |
96.6% |
-4.2% |
Source: Capital IQ, a division of Standard & Poor's, and author's calculations. Returns adjusted for dividends. Returns as of Aug. 20, 2010.
The Foolish bottom line
Warren Buffett reminds us that growth and value are joined at the hip. If a company's management can't find ways to grow sales while earning positive spreads on its investments along the way, I'd just as soon hang on to my capital. Fortunately, Pegasystems' track record of creating value as it grows makes it well worth considering.
The Motley Fool Inside Value team also loves a good Foolish growth stock. You can read all of their research reports, and see their best buys for new money now, with a 30-day free trial.
