5 Top Tweeners

If you've ever sought to get seriously rich from stocks, then you've owned a tweener.

A tweener, dear Fool, is like your pal Chuck. Still a great athlete, Chuck no longer rules the hardwood with his 40-inch vertical leap. He's become what we sports addicts call a gamer. He passes more. He's developed a nice shot from the corner. And though he doesn't dunk as much, or as spectacularly, as he did, Chuck is still a force in the paint.

What we fans don't know is how long Chuck will be in the starting lineup. Chiseled veteran Abe has a wicked hook shot that won't quit. And Larry, the little guard whose hip-shaking moves smoke defenders, has the makings of a future superstar. Both are vying to cut into Chuck's minutes on the floor.

In Foolish parlance: Chuck is a tweener, Abe is a Rule Maker, and Larry is a Rule Breaker.

Growing up is hard to do
The stock market has plenty of Chucks. They'll either create billion-dollar fortunes as they come to dominate industries, as Cisco and Microsoft have, or they'll be destroyed in the process, as Gateway almost was.

Therein lies the problem. Investing in tweeners can be both dangerous and exceptionally profitable -- the trick is picking your winners well, as David Gardner has. He produced nine years of 20% average returns hunting for misunderstood multibaggers in the making. His team at Motley Fool Rule Breakers continues the tradition today.

Let's have the list
You, too, can join in the effort, thanks to Motley Fool CAPS. Each week, we'll use the database to find three-star stocks that are expected to boost earnings by at least 15% annually over the next five years. Here is today's list:

Bear in mind that this isn't a list of recommendations. Instead, I offer these stocks as candidates for further research.

At first, I was tempted to go with CrackBerry maker Research In Motion, which reported blowout quarterly results last week. RIM's pioneering smartphone has been one of the few not to feel the sting of the iPhone.

Guess who's coming to your portfolio?
But today's column is dedicated to retailers. Guess?, in particular. Here's why that might strike you as odd:

Trouble is, this table omits a key statistic: Guess? has seen dramatic improvements in both gross margin and returns on capital through the end of last year. (Margin expansion has continued into 2007. Capital IQ hasn't yet posted this year's figures for ROC.) Peers Polo Ralph Lauren (NYSE:RL) and Gap (NYSE:GPS) have been far less consistent.

But not teen sensation Abercrombie & Fitch; it's been a stellar performer for years. What I find interesting is that it's the only one of the four retailers from above to have outperformed Guess? in terms of 2006 returns on capital. (33.1% versus 28.0%.)

A year ago I'd never have compared these two. Guess? changed my perspective when it launched its "G" line for young adults earlier this year. Revenue has since surged.

Then there's the valuation. PEG ratio is no perfect indicator, but on that basis, Guess? trades at a discount to both its peers and its expected growth, which strongly suggests a margin of safety for those who buy now. I'll be among that group; Guess? joins my CAPS portfolio today.

But that's me. What would you do? Would you buy Guess? at today's prices? Let us know by signing up for CAPS now. It's 100% free to participate.

See you back here next week for five more top tweeners. And in the meantime: Merry Christmas and happy holidays!

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