3 Growth Stocks Ready to Launch

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, even through the company's turbulent recent years, the investment would still have brought you a return of more than 1,600%, turning $10,000 into $174,000.

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 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 short-short version:

1. 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.
2. 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.
3. 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 (NYSE: NUE) in the mid-1970s. Nucor was a growth-mover at the time, and it 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 -- making each of its plants smaller, more efficient, and most important, more profitable. And today the company still looks like a little brother compared with big players like Arcelor Mittal (NYSE: MT).

But you didn't need to be Fisher to take advantage. Even if you had bought the stock in 1990, long after the company's initial move, you would have a fat 1,625% return on your hands. That's a 17.1% annual return, compared with the market's 7.9%.

The next wave
I'm an analyst on the 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 I believe have tremendous potential:

GameStop has had a heck of a run over the past two years -- it's up some 200%. But it isn't cooling off anytime soon. The company just delivered yet another round of blockbuster holiday sales and should continue this exciting pace with more top-notch titles coming out in the next quarter. It's going to take a heck of a lot to slow down this freight train.

Immersion is a recent addition to the Rule Breakers family, and it does behind-the-scenes development in many of tomorrow's most exciting products. The company is a leader in "haptics" and develops technologies that allow people to feel their surroundings better while operating mechanical objects. Think about a video game controller that can physically simulate a heartbeat in your hand or a violent car crash. In the medical field, Immersion's technology allows doctors to refine their surgical skills in a risk-free environment. This intriguing pick is at the forefront of its industry -- where, no doubt, many other companies will seek its skills in the near future. Just ask Logitech (Nasdaq: LOGI), Microsoft, or Sony -- these companies have already done business with the firm.

Finally, Tesoro is a growing gas retailer and refiner. Big oil growth isn't a surprise to anyone at this point. But after getting hammered hard in the last few weeks, I discovered an interest in this west coast dominant player. Oil priced at $100 isn't the end of it, and the U.S. (and other countries around the world) will undoubtedly consume all we can.

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 without obligation. We're thumping the market average right now by more than 13 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 does not own shares of any company mentioned. Immersion is a Rule Breakers recommendation. GameStop is a Stock Advisor pick. Microsoft is an Inside Value selection. The Motley Fool has a disclosure policy.