I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit that some growth stories are bogus. In this regular series, we'll scrutinize many of the market's great growth stocks, to see which of them show real, numerically relevant signs of sustainability.

Next up in our series is Continucare (NYSE: CNU), a Florida operator of outpatient service centers similar to those operated by major hospital groups, such as Tenet Healthcare (NYSE: THC) and Universal Health Services (NYSE: UHS).

Foolish facts



CAPS stars (out of 5)


Total ratings


Percent bulls


Percent bears


Bullish pitches

59 out of 59

Highest-rated peers

American Service Group (Nasdaq: ASGR), Triple-S Management, IntegraMed America (Nasdaq: INMD)

Data current as of Aug. 27.

No one dislikes Continucare's business at these levels. Does that amount to unreasonable optimism? Not according to All-Star investor dsp444, who wrote in May: "This looks like a solid health care company. Well run with good margins and returns. Solid cash flow and no debt is always a good thing too."

Continucare may also be cheap. The stock entered the day trading for about 9.7 times trailing and 8.9 times forward earnings. Long-term, analysts see Continucare improving per-share earnings by 20% annually.

The elements of growth


Last 12 Months



Normalized net income growth




Revenue growth




Gross margin




Receivables growth




Shares outstanding

60.1 mil.

59.4 mil.

67.7 mil.

Source: Capital IQ, a division of Standard & Poor's.

I'm not wild about these numbers. Here's why:

  • There's a huge gap between revenue and normalized net income growth -- more than can be explained by gross margin gains. (Though those gains are nice to see.)
  • Receivables growth is on the rise, yet revenue growth is lumpy. Sure, Continucare is growing faster than it was last year, but growth has also moderated since 2008.
  • Then there's the share count. Continucare has bought back shares to boost per-share earnings. There's nothing inherently wrong with that -- especially here, since management has a history of generating progressively higher returns on capital. Still, we shouldn't delude ourselves into thinking that Continucare is capitalizing on a massive growth opportunity. Evidence points to the contrary.

Competitor checkup


Normalized Net Income Growth (3 years)



IntegraMed America


Metropolitan Health Networks


UnitedHealth Group (NYSE: UNH)


WellCare Health Plans (NYSE: WCG)


Source: Capital IQ. Data current as of Aug. 27.

This table may be even more telling. As prolific at producing earnings growth as Continucare's management team has become, Metropolitan has grown even faster, and IntegraMed is anything but a snail.

Of these three, IntegraMed seems to be producing the most organic growth. Its revenue is up 20.3% annually over the past three years, besting Continucare's 17.7% and Metropolitan's 12.5%, and well within spitting distance of IntegraMed's earnings growth over the same period.

Grade = unsustainable
Continucare looks like the kind of stock that we call a Faker Breaker at Rule Breakers. Bottom-line growth is disconnected from the top line, boosted at least in part by share buybacks. Also, with a competitive advantage tied to its regional footprint, I'm unconvinced of this stock's ability to deliver multibagger returns.

Even so, I can't bring myself to short Continucare in my Motley Fool CAPS portfolio. It's far too cheap to short, and it may even be a market-beater. If you buy Continucare, buy it for value.

Now it's your turn to weigh in. Do you like Continucare at these levels? Would you make it one of our 11 O'Clock Stocks? Let the debate begin in the comments box below.

You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

Further Foolishness featuring Continucare:

Both our Motley Fool Inside Value and Motley Fool Stock Advisor services have recommended shares of UnitedHealth Group. Motley Fool Options has recommended a diagonal call position in UnitedHealth. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool owns shares of UnitedHealth Group and is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.