Can you stomach a growth portfolio?

Small-cap growth stocks are far more volatile than anything that's in the S&P 500 index, but it's worth your while to strengthen your stomach. Why? Well, don't you want to be like the man who bought Motorola when it was a tiny radio manufacturer back in 1955 and never sold? He multiplied his money many, many times over, and that one experience -- and others like it -- helped him become one of the best investors of all time.

But you didn't need to be investing in 1955 to profit from Motorola's amazing growth. If you had bought the stock as late as 1980 and held, through even the company's turbulent recent years, the investment would still have brought you a return of nearly 2,000%, enough to turn $10,000 into $209,000.

Those types of returns are precisely why you should not only stomach growth stocks but also make them a part of your portfolio today.

The growth king
The Motorola man I mentioned above is the famous Philip Fisher, and in 1958 he wrote Common Stocks and Uncommon Profits -- a timeless book for all investors. His greatest contribution to growth investing may be his 15 Points. Though they won't shield you from short-term volatility, these points will help you achieve incredible long-term returns.

Here's the really short version ...

  • Great growth stocks must take advantage of a substantial market opportunity to profit. That means they will be both "fortunate and able." Of course, being fortunate and able requires many things, including an excellent industry position, competitive advantages, prudent uses of discretionary dollars, efficient models, and superior sales forces.
  • Great growth stocks must have a balanced and transparent management team. A potential investor must be able to look at a company's leadership and believe that it has integrity, an ability to handle distress, and an insightful vision for the future.
  • Great growth stocks must have outstanding accounting and disclosure policies. Anything less than excellence is unacceptable.

How do these qualities translate to significant shareholder return? Examine Fisher's investment in steelmaker Nucor in the mid-1970s. This was at the time the growth mover went from a relative pipsqueak to the second-largest American steel manufacturer by the time Fisher sold it.

Nucor embodied some of the very basic principles that Fisher espoused. For example, when many steelmakers were concentrating on volume and turnout, Nucor focused on implementing new technologies into its production methods, in an attempt to make each of its plants smaller, more efficient, and most importantly, more profitable. And today, the company still looks like a little brother compared with massive conglomerates such as CVRD (NYSE:RIO).

But again, you didn't need to be Fisher to take advantage. Even if you had bought Nucor stock in 1990, long after the company's initial move, you would have a fat 1,825% return on your hands. That's a 19% annual return compared to the market's 9%.

The next wave
I'm an analyst on The Motley Fool's Rule Breakers growth service, and I am constantly on the prowl for the best growth stocks out there. So with an eye on Fisher's most important lessons, here are three growth stocks that I believe have tremendous potential:


Market Cap

Forward P/E

Consensus Long-Term
Growth Estimate

MEMC Electronic Materials (NYSE:WFR)




BE Aerospace (NASDAQ:BEAV)




Atwood Oceanics (NYSE:ATW)




MEMC is no stranger to growth investors. The company that supplies high quality silicon products for solar manufacturers like SunPower (NASDAQ:SPWR) and Rule Breakers recommendation Suntech Power (NYSE:STP) has been hot lately -- the stock is up more than 90% since 2007 began. Supply-side pressures in the silicon market have allowed MEMC to clean up. But this is no short-term trend -- as long as we're looking at $100 oil, solar will become a more and more attractive option.

Another stock that has been performing great this year is BE Aerospace -- up nearly 100% year to date. This company provides interiors for planes that slide the scale of size from Boeing's (NYSE:BA) massive jumbo jets all the way down to smaller business jets. If you want a piece of the global growth in air traffic, BE Aerospace is an excellent way in.

Atwood Oceanics is an offshore driller that currently operates eight rigs with one more soon on the way. This company is well-diversified geographically and is running a very efficient operation compared to its competitors. Though drilling is a historically cyclical operation, look to the company to remain a strong grower in years to come.

More where those came from
These are three of my favorite growth picks, and I look forward to seeing them flourish. Fisher's principles, which are elemental in my own approach, are also a big part of how we research at Rule Breakers -- where growth is king.

If these principles agree with your style, then I advise you to try the service free for 30 days. We're thumping the market average right now by nearly 25 percentage points. You can see all of our research and recommendations immediately upon joining, and there is no obligation to subscribe.

This article was first published July 30, 2007. It has been updated.

Rule Breakers analyst Nick Kapur owns no shares of any company mentioned. Atwood Oceanics is a Stock Advisor recommendation. The Motley Fool has a disclosure policy.