Wal-Mart is the No. 1 retailer in the world. In 1972, it was breaking the rules of the American marketplace. I've been studying the company's archived annual reports because they offer a blueprint of a small company on the verge of world domination.

A brief look back
The story of Wal-Mart's rise is the stuff of legend. The cover of the company's 1972 annual featured the locations of its 51 stores in five states: Arkansas, Louisiana, Kansas, Oklahoma, and Missouri. Today, there are 1,500 stores in eight countries. In 1972, Sam Walton wrote that there were 2,300 employees in the Wal-Mart world. Today, there are 1.6 million associates. During that time, the company has increased more than 1,000 times in value -- growing from a $195 million micro cap to a $200 billion global leader. Along the way, investors realized 23% compounded annual growth.

Impressive? Quite. Amazing? Certainly. Reproducible? Absolutely.

So, then, how could investors have known way back when that Wal-Mart was a Rule Breaking growth stock?

Clues to use
Three traits jumped out at me while flipping through the Wal-Mart annual:

  1. Based on top-line growth, the company was going nowhere but up. From 1969 to 1970, sales grew 44%. From 1970 to 1971, they grew another 44%. From 1971 to 1972, sales grew an astounding 76%. Sales were increasing and accelerating.
  2. Management at the young company was competent and shareholder-friendly. Return on equity (ROE) was 35% in 1971. Return on assets was 10%. The very next year ROE was an absurd 63%. In other words, Sam Walton and his team were maximizing the business model.
  3. President Sam Walton had a clear and compelling vision for the future. That vision included dominant store growth in communities within 300 miles of the distribution center and an efficient business model that could maintain the lowest possible prices and margins.

Those three Rule Breaking tenets formed the basis of Wal-Mart's sustainable advantage and helped it become one of the strongest public companies in the world.

Foolish final thoughts
Accelerating sales, a sustainable advantage, and smart management are three factors the Motley Fool Rule Breakers team uses to identify tomorrow's landscape-changing companies today. They were the key to Wal-Mart's success, and they also catapulted a number of other industry-leading companies, including Vodafone (NYSE:VOD), Research In Motion (NASDAQ:RIMM), E*Trade (NYSE:ET), Chico's (NYSE:CHS), Pixar (NASDAQ:PIXR), CarMax (NYSE:KMX), and Rule Breakers recommendation NetEase (NASDAQ:NTES).

Early investments in such groundbreaking companies could have supercharged your portfolio. How much? Since it's not reasonable to assume you can buy every Rule Breaker at its IPO, let's assume you found these companies a full two years after they came public:

Company

IPO Date

CAGR*

Wal-Mart

Oct. 1, 1970

21%

Vodafone**

Oct. 26, 1988

18%

Research In Motion**

Feb. 4, 1999

18%

E*Trade

Aug. 16, 1996

14%

Chico's

March 24, 1993

56%

Pixar

Nov. 28, 1995

18%

CarMax

Feb. 7, 1997

37%

NetEase**

June 30, 2000

183%

Average CAGR

44%

*Compound annual growth rate, taken two years after IPO date to the present.
**Vodafone CAGR calculated two years since listing date on the New York Stock Exchange; Research In Motion and NetEase CAGR calculated two years since listing date on the Nasdaq.


A long-term 44% CAGR is outlandish -- the average from the above table is skewed by the recent performance of NetEase. So let's back that out and factor in some losers (after all, no investor can score 100% accuracy). With two stocks that go to zero, you're still looking at a 20% CAGR. And with a 20% CAGR and a $10,000 investment, you can be a millionaire in a little more than 25 years. That's not to say there aren't risks, of course. But the axiom of finance is: Greater risk, greater reward. There is enormous profit potential in finding Rule Breakers early on -- if you can do it with any regularity.

To date, the Rule Breakers team has found more than 20 companies that also fit these criteria -- and those picks are up more than seven percentage points on the S&P 500 -- and they expect to find many more. If you want to take a look at the companies they've found, read their analysis, and interact with thousands of investors who are actively following these companies, take a 30-day free trial to the service. You have no obligation to subscribe.

It pays to look for companies that are poised to break the rules of mediocre business.

This article was originally published on Aug. 22, 2005. It has been updated.

Tim Hanson owns none of the companies mentioned in this article. Vodafone is a Motley Fool Inside Value recommendation. Pixar is a Motley Fool Stock Advisor recommendation. At the Fool, no writer is too cool fordisclosure... and Tim's pretty darn cool.