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 679%, turning $10,000 into $77,900.

Those types of returns are precisely why you should not only stomach growth stocks, but 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 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 steel maker Nucor in the mid 1970s. This was a growth mover at the time that 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 steel makers 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 importantly -- more profitable. And today the company still looks like a little brother compared to big players like POSCO (NYSE: PKX).

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 2,053% return on your hands. That's an 18.6% annual return compared to the market's 7.4%.

The next wave
As an analyst on our Motley Fool Rule Breakers growth service, 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 (millions)

Forward P/E

Analyst Growth Estimate

Marvel (NYSE: MVL)




LMI Aerospace (Nasdaq: LMIA)




Blue Nile (Nasdaq: NILE)




I don't own a stock that I enjoy researching more than Marvel. The company is just weeks ahead of the biggest event in its history: the major release of its first self-produced film, Iron Man. Thanks to this ongoing movie-making endeavor and a core business that continues to grow nicely, I suspect Marvel will look more like Walt Disney (NYSE: DIS) in years to come than the $2 billion niche play it is today. With 5,000-plus characters on its roster, an asset-light business model, and plenty of hardcore fans, Marvel seems like a stock ready to launch.

LMI Aerospace provides structural components to major aircraft manufacturers like Boeing, Embraer (NYSE: ERJ), and numerous others. You may never have heard of the company, but as the rush to fill air travel demand and provide critical materials to the military builds, so too will this company. It sports a miniscule $230 million market cap, but if you believe this aerospace market is going up, LMI is an excellent way to get a piece of the action.

Rule Breakers recommendation Blue Nile is a serious disruptor in the jewelry industry.

Though the stock has gotten hammered from highs north of $100 down to the $50-point where it sits today, I think this online business is poised to surge back -- big time. We've seen bricks-and-mortar businesses fall across other segments of the economy (in movies, music, books, etc.), so I think it's only a matter of time before the best online model sticks it to competitors like Zale (NYSE: ZLC).

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 research is done 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 11 percentage points. You can see all of our research and recommendations immediately upon joining, and there is no obligation to subscribe.

Fool Analyst Nick Kapur owns shares of Marvel. Posco is an Income Investor selection. Embraer, Marvel, and Disney are Stock Advisor recommendations. Blue Nile is a Rule Breakers pick. The Motley Fool has a disclosure policy.