How to Find the Greatest Growth

Wal-Mart is the No. 1 retailer in the world. In 1972, it was breaking the rules of the American marketplace. Recently, I've studied 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 report featured the locations of its 51 stores in five states: Arkansas, Louisiana, Kansas, Oklahoma, and Missouri. Today, there are more than 3,800 stores -- in 11 countries! In 1972, Sam Walton totaled 2,300 employees in the Wal-Mart world. Today, there are 1.8 million associates. Since the early 1970s, the company has increased more than 1,000 times in value -- growing from a $195 million micro cap to a $200 billion global leader.

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

So, then, how did they do it? 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 pages of 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
Accelerated sales, 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.

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 year after they came public:

There's simply enormous profit potential in finding Rule Breakers early on -- especially if you can do it with any regularity.

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

Tim Hanson owns none of the companies mentioned in this article. Amazon.com, Garmin, and Bed Bath & Beyond are Motley Fool Stock Advisor recommendations. Bed Bath & Beyond and Wal-Mart are Inside Value recommendations. No Fool is too cool fordisclosure.