Congratulations! Your portfolio is perfect. The collection of companies that you have assembled is -- mwah, tresmagnifique -- the perfect combination of bottle rocket and short wick. Celebrated investors like Warren Buffett, Peter Lynch, and David Gardner have you on speed dial. Riches beyond measure are just a few trading days away.
Now, I'd love to tell you that with a straight face. Really. I'd love to deny that I saw you nodding along with me just now. It's human nature, really. Every investor thinks he owns the best stocks. It's a bit like rooting for your alma mater's football team or cheering on that lottery ticket or roulette wheel. You think you've got a fighting chance to win -- or you wouldn't be there at all.
It's not hopeless. Beating the market is a lot easier than you think. It's just a matter of identifying the great growth stocks of tomorrow before the rest of the market comes around. Sound daunting? It isn't, really.
Best of breed in a flea-ridden world
By now, you've probably heard the expression "best of breed" a countless number of times -- and you're probably wondering what it's all about. In the corporate software space, the phrase refers to cherry-picking the best applications that excel at a particular task. Instead of resorting to the integrated one-vendor solution suite, you assemble a hodgepodge of specialized brands. It's not the easy way out. It is, however, the best way out.
When you think about it, investing is just like that. Even if your portfolio is heavily weighted toward a particular sector, or there's a common theme that resonates throughout your holdings, every stock you own is unique. To you, it was the best of its breed.
"Best of breed" has evolved in recent years. These days, it's the process of ferreting out the superior company in a particular sector. If you're talking digital music players, Apple Computer (NASDAQ:AAPL) may be the first -- and only -- name that comes to mind. Even a battered industry like supermarkets allows a Whole Foods Market (NASDAQ:WFMI) to float to the top.
The market rewards excellence. That's why finding these top performers is often a financially rewarding quest. What could be better than that? Well, for one, identifying these best-of-breed companies just as they begin to shine.
Finding great growth stocks early is what our Motley Fool Rule Breakers newsletter service aims to achieve. It's not an intimidating process. Who here didn't know that dynamic companies such as Yahoo! (NASDAQ:YHOO) and Adobe (NASDAQ:ADBE) were up to something special early in their tenure? If you weren't familiar with their models, you could still have warmed up to their income statements.
Decelerate at the sign of acceleration
Consider Helmerich& Payne (NYSE:HP). The oil driller is clearly in demand in these energy-intensive times, but a look at its financials reveals just how well the company is doing. In fiscal 2003, revenues inched a mere 0.9% higher. Last year, the top line surged 20.5% higher. Through the first three quarters of fiscal 2005, revenues have clocked in 50.6% higher. That's called accelerating sales growth.
You just don't see that often. Logic would dictate that, as a company grows, it's doing so off a larger base of sales. That makes growth, on a percentage basis, more difficult to keep up with. Let's say a company produced revenue of $50 million one year and then $100 million the next. That's a cool 100% growth in revenue. If it clocks in at $160 million the following year, that $60 million more in sales is even better than the $50 million it generated a year earlier. However, on a sales-growth basis, it would simply mark a 60% improvement from the previous year's $100 million sum.
More often than not, you can single out the companies stepping heavy on the accelerator within the same year. You may not be familiar with Educate (NASDAQ:EEEE), since the company went public earlier this year, but you may know its handiwork. As a leader in tutoring grade school students, Educate is the company behind the Sylvan learning centers and the Hooked on Phonics program. Educate has grown the top line by 21% through the first nine months of 2005, and that includes a 27% revenue spurt in the latest September quarter. Even if you don't understand the Educate model, numbers don't lie.
The stock pick of the litter
When CNET Networks grew revenue at a mere 3% in 2003, it was difficult to envision the technology industry publisher as a speedster. However, a push to grow its online empire and monetize it more efficiently has paid off. The top line went on to grow by 18% last year and has marched 22% higher so far in 2005. Accelerating sales, the company's appealing portfolio of online properties, and the recent rash of buyouts in a content-hungry dot-com world have made the stock a double-digit market-thumper since its recommendation to Rule Breakers subscribers four months ago.
Another accelerator in the tank has been Intuitive Surgical (NASDAQ:ISRG). Revenue grew by just 27% in 2003, but the company's line of robotic surgical arms was starting to gain wider acceptance in the operating room. Revenue grew by 51% last year and surged 66% higher through the first nine months of 2005. Does the market reward accelerating sales growth? You bet! Shares of Intuitive Surgical have more than doubled since they were first singled out to Rule Breakers subscribers nearly eight months ago.
Of course, it helps if you understand why growth is accelerating. Whether it's an established company with a suddenly vibrant business or a promising upstart bent on rewriting the rules, knowing a little about the disruptive shift that is taking place helps. However, you can always lean back on the income statement. Organic acceleration in sales growth is nothing to scoff at.
If you don't want to screen for success alone, why don't you join us in the Rule Breakers community? We're doing just that around the clock -- and now you can kick the tires for free through Dec. 9 as part of a 30-day free trial.
Congratulations! Your portfolio is perfect -- as in, perfectly waiting for you to take the next step in market enlightenment.
This article was originally published on Sept. 12, 2005. It has been updated.
Longtime Fool contributor Rick Munarriz knows all about chasing accelerating growth, in part because he has two young sons. He is a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its stage of defiance. Whole Foods is a Motley Fool Stock Advisor recommendation. The Motley Fool isinvestors writing for investors.
