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" countless 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 if there is a 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 Linux, Red Hat
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 companies such as Adobe
Decelerate at the sign of acceleration
American Science & Engineering has become a monster performer thanks to its screening and security products. With only one rival -- OSI Systems
That is called accelerating sales growth. You just don't see that very often. Logic would dictate that as a company grows, it is 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.
Yes, even large companies can step on the gas from time to time, and it can happen on the bottom line, too. Hewlett-Packard
The stock has rewarded investors, more than doubling since bottoming out nearly four years ago. Even if you never felt comfortable with the prospects of the PC sector, it was easy to see the attraction to HP as a turnaround story. The numbers don't lie.
The stock pick of the litter
Another recent accelerator has been iRobot. The leader in consumer robotics, with its Roomba vacuum-cleaning automatons and now its Scooba floor-scrubbing saviors, has been growing awfully quickly in recent years. In 2004, the company generated 75% more in revenue than it had in 2003. Last year, it felt as if the company was coming back down to earth with a more modest -- yet still impressive -- 49% improvement in sales.
Now we find the company reporting first-quarter results for 2006 that have revenue soaring 123% higher. Even if it's ultimately a blip in a traditionally sleepy period, it starts the company on the right foot this year.
Both American Science & Engineering and iRobot share something else beyond a refreshingly potent case of accelerated growth. Both stocks have been singled out this year as Rule Breakers recommendations.
Of course, it helps if you understand why growth is accelerating. Whether it's an established company with a suddenly vibrant appendage (like Apple Computer with its iPod) or a promising upstart bent on rewriting the rules (like iRobot), 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 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 Sept. 12, 2005. It has been updated.
Longtime Fool contributor Rick Munarriz does not own shares in any of the companies mentioned in this article. He is a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its stage of defiance. Intuit and Dell are Inside Value recommendations. Dell is a Stock Advisor recommendation. The Motley Fool isinvestors writing for investors.