Growth stocks are the beauties of the stock world, plain and simple. They're exciting, they have good stories, and they can make you a lot of money.
But for all their beauty, growth stocks are also the prima donnas of the market. They can be erratic, they don't always live up to their billing, and they tend to attract a shareholder base that's ready and willing to run at the first signs of slowdown. For those reasons, caution is certainly in order when you enter the world of growth investing.
Fortunately, The Motley Fool's CAPS service brings us the collective intelligence of a community of more than 135,000 investors and is a great resource for separating the Jessica Albas from the Jabba the Hutts. Each of the stocks competing for this week's top spot has a market cap of at least $100 million and grew its net profit per share by an average of 20% or more per year over the past three years. (You can rerun the screen for yourself.) So let's go ahead and meet our contestants.
I might be able to get away with simply describing Baidu
This is good news for Baidu, which naturally benefits when the local government stiff-arms the global search king. Not that Baidu has had much trouble putting up stellar numbers to date. For the three years ending in 2008, the company managed to grow revenue an unbelievable 1,000%.
If the notion of cloud computing seems like science fiction to you, then consider VMware
Unless you live deep in the New Jersey Pine Barrens and consider tea with the Jersey Devil to be your primary form of entertainment, you probably run across Dolby
These technologies go by names like Pro Logic, Digital Surround, and TrueHD, and have become a must for nearly every type of entertainment. Selling a must-have product like this is rarely a bad thing for your bottom line, and Dolby's 400% growth of net income between 2004 and 2008 shows that the company has been making the most of its leadership position.
A constant refrain in the song and dance about health-care reform is that medical practices need to modernize. Fortunately, there are companies like Quality Systems
While electronic medical records have often been a tough sell, many investors hope that reform efforts will turbocharge their adoption. This, of course, would be great news for Quality Systems, which has -- until the most recent quarter, at least -- been growing like a weed in magic manure.
There are three primary nutrients that plants need: phosphorus, potassium, and nitrogen. Fertilizer giants Mosaic
The math of Terra Nitrogen's business is pretty simple: When global demand grows, it can sell more fertilizer at higher prices. As has been the case with potash and phosphorus, the global recession appears to be softening the market for nitrogen fertilizers. However, industry experts have been predicting continued steady growth in demand, which should lead to good times for Terra.
The envelope, please ...
The voting is in; the CAPS community members have shared their opinions. In one fell swoop, we're going to guide Baidu, VMware, and Terra Nitrogen away from the winner's circle. CAPS members didn't entirely dismiss any of these stocks, but their three-star ratings put them solidly in our "maybe later" pile.
For Baidu, at least, CAPS members seem to be leery of the competition the company faces, not to mention the different consumer dynamic in the Chinese market versus the U.S. one. Some CAPS members have also balked at the stock's valuation, which is currently 51 times expected 2009 earnings.
With a shiny four-star rating, Quality Systems came darn close to nabbing the top spot this week. CAPS members seem to love the potential marriage of technology and health care and have high hopes for President Obama's reform efforts. The only knock against the stock seems to be its valuation, which is nearly 30 times expected fiscal 2010 earnings per share.
Donning the Top Growth Stock crown is Dolby. Considering that valuation was a key tripping point for some of its competition for the throne, it's notable that Dolby's near-20 current earnings multiple isn't exactly cheap. However, numerous points could justify this above-market valuation.
Dolby Laboratories should gain a great deal of market share in the coming years due to the growing demand for good audio products in PCs, TVs, phones, electronics, cinemas, and other growing media instruments. As more companies try to please the customers with additional features and great sound to go with games, TV, HDTV, and all of the programming that comes along with the gadgets [Dolby] stands as a leader in audio technology and thru its patents it will generate new revenues from other [companies] that want to use its technologies.
Now go vote!
Do you think that Dolby has what it takes to be America's next top growth stock? Head over to CAPS and let the rest of the community know what you think.
Baidu, Google, and VMware are Motley Fool Rule Breakers picks. Dolby and Quality Systems are Stock Advisor selections. Want to know why and get some help finding other potential winners? Try either newsletter free for 30 days.
Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can check out the stocks he's keeping an eye on by visiting his CAPS portfolio, or you can connect with him on Twitter: @KoppTheFool. The Fool's disclosure policy would surely win America's Next Top Disclosure Policy, but for some reason there's no such contest.