Color to the Numbers: The Best Small-Cap Growth Stocks

Thanks to the Internet in general and sites such as Yahoo! Finance and MSN Money in particular, investors have more tools than ever to search for stock ideas by running screens of stock databases. But screens often return numerous stocks that need to be weeded out because the numbers don't tell the whole story. Maybe the massive growth at one company was a result of one-time tax adjustments, or maybe the screen didn't catch that a dividend was canceled.

So just like the color-by-numbers books that kids doodle on, the picture for stocks from any screen doesn't become clear until we add the appropriate color to the page. In this edition of "Color to the Numbers," we'll enlist Motley Fool CAPS to take a Foolish look at a screen for small-cap growth stocks to see which ones may be worth investigating further and which ones you'd be better off casting aside.

Better a screen than a window
The community of knowledgeable investors who rate stocks in CAPS will help us in our search for small-cap growth stocks. In CAPS, investors can see at a glance how the collective community rates a company today, including how the very best All-Star stock pickers -- CAPS players with a ranking above 80 -- rate a given stock. You'll even find pitch commentary and blogs that give details behind the bull and bear opinions. All of these tools give investors much more in the way of qualitative resources than just numbers and tables.

So let's take a look at our small-cap growth screen for today and a handful of the top stock candidates it returned. To run this screen, we'll use the following criteria:

• Market cap between $100 million and $1 billion.
• Estimated growth rate in earnings per share for the next five years of at least 25%.
• Revenue growth for the current year to date of at least 30%.

This should give us the cream of the crop in terms of small-cap stocks that already have a developed performance record that is expected to continue. The combination of the EPS growth estimate and the minimum revenue growth target will give us stocks expected to profitably capitalize on an already thriving business. Understanding what's behind these high expectations for growth is where CAPS can really help.

Opinions with the numbers
Here's a sampling from the list of stocks our screen pulled up today.

Our small-cap growth screen pulls up a wide variety of stocks to consider -- everything from a stun-gun maker to an online wedding portal to a Chinese powdered milk producer. That's the great thing about small caps -- there are plenty of options from which to choose the next big thing.

One company that wants to be the next big thing in law enforcement is high-voltage stun-gun maker and Motley Fool Rule Breaker pick TASER. The company has a storied past full of claims of lethal effects of the company's products that are quickly followed by detailed rebuttals from management (which itself has been the object of scrutiny). But the embattled debate over TASER's products seems to have eased somewhat in the face of improved operations at the company (it's amazing how things tend to quiet down when companies actually start making money). Increased sales to federal and local law enforcement in the second quarter, as well as $5.5 million in international sales, have helped contribute to the company's 37% projected growth rate. But not all investors think TASER is out of the legal woods just yet -- nearly 10% of CAPS investors remain bearish on the stock.

Another high projected growth candidate making our screen is digital communications security provider Zix. The $100 million Dallas-based company has earned a 40% growth projection based on demand for the company's secure email solutions and scripting services that it sells to corporations and government agencies. But the company has yet to turn a profit and is acutely focused on its expenditures to reach cash flow-positive operations by the first quarter of 2008. Even with its long history of losses, though, investors in CAPS are largely bullish on Zix's future, with nearly 99% voting for the company to outpace the S&P in the future.

And just to prove that not all red-hot small caps garner widespread support, Pacific Ethanol shows great promise that fails to impress the general CAPS community. The culprit is doubt over ethanol's role in our future fuel needs -- while some claim ethanol will be the de facto fuel of the future, many investors disagree. Many alternative energy gurus also see issues with corn-based ethanol and the economic case for widespread use of the fuel, given the huge demand it places on corn crops. I'm sure the debate has many more twists and turns ahead of it, but in the meantime, 79 of 123 CAPS All-Star investors have voted for Pacific Ethanol to underperform the S&P going forward.

Let 60,000 investors be the judge
The collective wisdom of a huge pool of investors can quickly add color to a whitewashed page of numbers. But even with an entire community of qualified opinions acting as the judge, individual investors are still the jury and should perform their own research.

Want to see your favorite screen results get run through the wringer in the CAPS community? It's free to tap the knowledge base and even give your own opinion. Join the discussion at Motley Fool CAPS today!