Buy This Retail Bargain While You Still Can

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 some growth stories are bogus -- hence this regular series.

Next up: Joe's Jeans (Nasdaq: JOEZ). Is this casual apparel maker the real thing? Let's get to the numbers.

Foolish facts

Data current as of Sept. 27.

High-performing stocks tend to get the attention of high-performing Fools, and many of the top stock pickers in Motley Fool CAPS like Joe's Jeans.

"This is clearly a small cap play," wrote All-Star investor TSIF in February, "just above the $100 Million CAPS pick threshold. Margins are only 7-9%, (typical in retail). Debt is half of cash on hand. Insiders have been bailing in a big way since $1.35. With [26%] of ownership, their sales are still relatively small. The play on this one has some risk that the retail side 'takes.'"

I'm not a fashionista, so I can't tell you whether Joe's designs will persist. But on the Street, there's enough belief in this growth story to project 71% annual earnings improvement over the next several years, according to Capital IQ. If that figure is even half-right, shares of Joe's could enjoy a HUGE rally from today's levels.

The elements of growth

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

There's mostly good news in this table. Let's review:

• Normalized net income has, shall we say, normalized. This isn't necessarily a bad thing, especially since revenue growth is accelerating.
• Receivables, meanwhile, are touching hypergrowth levels. This would be worse -- reflective of a business unable to collect what it's owed -- if not for accelerating revenue growth. Instead, I see a company entering a growth phase, consistent with Wall Street's outsized expectations for annual earnings improvement.
• If I'm right, then management's work to keep a lid on shares outstanding is doubly important. First, it suggests excellent stewardship. Second, it puts existing owners in a position to yield the maximum benefits of outsized per-share profit growth.

Competitor and peer checkup

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

Unfortunately, we don't have enough data to provide a straight-line comparison between Joe's and its closest peers. And it's not like there aren't other great growth stories to choose from. Consider True Religion. The premium jeans maker has enjoyed massive growth over the past three years, and it still trades for a fraction of what analysts estimate as its long-term growth potential. Joe's may offer more risk without much more reward.

Grade: Sustainable
I'm oddly comforted by massive receivables growth, because it suggests that demand hasn't peaked. Furthermore, with insiders still owning 26% of the business, management has plenty of incentive to keep this growth story going. I think they will, and as such, I've rated Joe's "outperform" in my CAPS portfolio.

Now it's your turn to weigh in. Do you like Joe's Jeans at these levels? Would you make it one of our 11 o'clock stocks? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 o'clock portfolio pick.

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