Maybe it's because I call myself a business-focused growth investor, but I've never believed in cheap stocks. Knock-off shoes are cheap. Fast food is cheap. Plastic toys are cheap. Cheap doesn't equal value.
Think about the last time you watched a 3-year-old with a new plastic toy. Raise your hand if the toy broke within 15 minutes. Don't be shy; you know as well as I do the paste eaters possess a special talent for destroying anything breakable, fast.
Like plastic toys, bad businesses have breakable stocks. Consider newspapers. Most media conglomerates have spent years trading for around 10 times earnings. With the S&P 500 currently trading for around 14 times earnings, these stocks might be considered cheap. (It's just 10 times earnings!) Trouble is, their underlying businesses aren't growing. Without revenue growth, there's no engine to drive returns.
Vroom, vroom ...
With growth, returns are easier to come by. Many of the best U.S. performers of the past 10 years enjoyed accelerating growth at one point during their decade-long run. Here's a closer look at these stocks and their performance:
|
Company |
2006 Rev. Growth |
2007 Rev. Growth |
2008 Rev. Growth |
2009 Rev. Growth |
Return History |
|---|---|---|---|---|---|
|
Medifast |
84.6% |
13.1% |
25.9% |
57.1% |
|
| Green Mountain Coffee Roasters |
39.5% |
51.6% |
44.2% |
59.6% |
|
| XTO Energy |
30.3% |
20.5% |
39.6% |
17.8% |
N/A |
| Hansen Natural |
73.6% |
49.3% |
14.3% |
10.6% |
|
| Bally Technologies |
26% |
24.9% |
(1%) |
(7.8%) |
|
| Southwestern Energy |
12.8% |
64.5% |
84.2% |
(7%) |
|
|
Terra Nitrogen |
(6.7%) |
49.7% |
41.9% |
(43.8%) |
|
| Contango Oil & Gas |
1,721.4% |
723.9% |
63.7% |
(15.7%) |
|
| Clean Harbors |
16.7% |
14.1% |
8.8% |
4.2% |
N/A |
|
Amedisys |
41.8% |
29% |
70.1% |
27.5% |
Source: CapitalIQ, a division of Standard & Poor's.
Did you look at the charts? If not, take a moment and click some links. Among other things, you'll find that Medifast took off when growth accelerated from 2007 to 2009 and that Green Mountain Coffee Roasters brewed its biggest returns from 2008 to 2009 -- just as the company was setting new records for revenue growth.
By contrast, Terra Nitrogen had its most productive run from 2006 to 2007. Revenue growth had taken off, and the stock followed. Shares of Amedisys fell in 2009 when top-line growth showed signs of slowing. See the pattern here?
Every one of these stocks has rewarded long-term holders. But in each case, the bulk of their returns came over a shorter period in which growth accelerated. Big Money investors rewarded the underlying business improvements by buying shares, and in the process handed multibagger gains to those who were in early.
By now you're probably asking how to spot accelerating revenue growth. Good question. There's no exact science, but analyst estimates are a good place to start.
These engines are warming up
Wall Street typically only looks two years ahead in projecting revenue growth. What you're looking for are stocks expected to grow faster than in the two years prior. Situations where management is stepping on the gas, if you will. Here are 10 to consider:
|
Company |
Est. Revenue Growth |
Historic Revenue |
|---|---|---|
|
Melco Crown Entertainment |
47.5% |
30% |
| Wonder Auto Technology |
45.4% |
41.4% |
|
Ctrip.com International |
39.6% |
35.8% |
|
ChinaCast Education |
37.4% |
31% |
| Lululemon Athletica |
37% |
33.2% |
| Amazon.com |
33.7% |
30.3% |
|
Netflix |
31.9% |
24% |
| priceline.com |
27.6% |
26.4% |
| VisionChina Media |
24.6% |
23.6% |
| Iconix Brand Group |
22.8% |
21.6% |
Source: Capital IQ, a division of Standard & Poor's.
Of these, I like Melco Crown Entertainment, Ctrip.com, ChinaCast Education, and Netflix most. Each one is expected to add several points of annualized revenue growth over the next two years.
To be fair, analysts could be wrong about these stocks. Fools know this, and we never, ever buy blind. In these situations in particular -- the kind we like most in our Motley Fool Rule Breakers service -- we want to know why analysts believe growth will accelerate. We want to know if it's possible they're being too conservative.
Business study is the only way to resolve that question fully. But in the case of my top four, I think it's very possible the Street is aiming too low. Melco Crown Entertainment is cashing in on Asia's fast-growing casino gaming industry. Ctrip.com is booking more travel for dealmakers who want in on China's growth story. ChinaCast Education is serving locals who see learning new skills as their ticket to joining China's growing middle class. And Netflix is the world's best-positioned deliverer of streamed video, a small but fast-growing market.
Think I'm wrong about these stocks? Have a better pick to share? Weigh in using the comments box below. You can also click on the names of any of my top four to add them to your Foolish watchlist.
These 10 stocks may be my picks for the best stocking stuffers, but our Foolish team of analysts has identified one positioned to beat all others in 2011. Find out which stock they're betting on by checking out this free special report
