Growth stocks are the beauties of the stock world, plain and simple. They're exciting, they have good stories, and they can make you a lot of money.
But for all their beauty, growth stocks are also the prima donnas of the market. They can be erratic, they don't always live up to their billing, and they tend to attract a shareholder base that's ready and willing to run at the first signs of slowdown. For those reasons, caution is certainly in order when you enter the world of growth investing.
Fortunately, The Motley Fool's CAPS service brings us the collective intelligence of a community of more than 170,000 investors and is a great resource for separating the Jessica Albas from the Jabba the Hutts. Each of the stocks competing for this week's top spot has a market cap of at least $100 million and grew its earnings per share by an average of 15% or more per year over the past three years. So let's go ahead and meet our contestants.
3-Year EPS Growth Rate
China Marine Food
Source: Yahoo! Finance, Capital IQ, a Standard and Poor's company, and CAPS as of April 7.
Growth without good looks
How in the world could it be that we've got two stocks on this list with three-year growth above 15% that are trading at midsingle-digit P/Es? For China Marine and China-Biotics, the problem is their size and where they're based. Both stocks appear to be caught up in the massive backlash that's been walloping Chinese small caps as short-sellers relentlessly launch attacks.
To be sure, the shorts haven't just been blowing smoke. Though Advanced Battery Technologies
To some extent, Thoratec is still reeling from a disappointing fourth-quarter earnings release and lower-than-expected 2011 guidance. But the stock has been in an even more extended downturn since last summer that's sliced more than 40% off the company's value. With growth slowing markedly from its blistering pace and competition potentially putting the squeeze on, investors appear to be questioning how much the company is really worth.
Strutting their stuff
While the stocks above haven't been able to sufficiently inspire CAPS members, MedcoHealth has.
There's little wonder why CAPS members would think so highly of this Motley Fool Stock Advisor pick. As a massive pharmacy benefits manager, Medco has a business that plays a key role in making the nation's health-care system more efficient and cost-effective. While it's not a business with overwhelming profit margins, significant scale and steady growth have provided attractive returns for shareholders.
Medco's balance sheet leaves something to be desired as it carries more debt than shareholder equity, but the company's profit easily covers its interest expense many times over. With a forward P/E below 14, the stock is definitely eye-catching.
But while CAPS members are pretty fond of Medco, it just didn't have what it takes to top this week's top growth stock, Teva Pharmaceutical.
Though Teva is primarily known as a generic-drug manufacturer, it does face patent challenges of its own thanks to branded drugs like Copaxone and Azilect. However, the company's business continues to be primarily driven by its generics business, which will only benefit from the wave of major patent expirations that pharma giants like Merck and Pfizer will face in coming years.
CAPS All-Star capitalgs has been a longtime fan of Teva's stock and this top-performing player's pitch rings as true today as it did back in late 2006:
Between their existing drugs and those in the pipeline (both generic and name-brand), and the increasing pressure to lower health care costs, Teva is uniquely positioned to profit both long and short-term.
Meanwhile, Teva does a great job turning its earnings into cash and has maintained a very strong balance sheet. While the dividend yield on the stock isn't overly impressive, the company has shown a commitment to consistently growing that payout. With a 2011 P/E of just 10, Teva's got a lot to like.
Now go vote!
Do you think that Teva has what it takes to be America's next top growth stock? Head over to CAPS and let the rest of the community know what you think.
Pfizer is a Motley Fool Inside Value recommendation. MedcoHealth Solutions is a Motley Fool Stock Advisor choice. The Fool owns shares of Teva Pharmaceutical Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out the stocks he's keeping an eye on by visiting his CAPS portfolio, or you can connect with him on Twitter @KoppTheFool. The Fool's disclosure policy would surely win America's Next Top Disclosure Policy, but for some reason there's no such contest.