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. That makes it 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 each grew its net profit per share by an average of 20% or more per year over the past three years. (Curious? You can run the screen for yourself). Let's meet our contestants.
Amazon has been wooing customers with cheap shipping on an ever-growing array of products. While it has always been a thorn in the side of Barnes & Noble, today it also competes with Apple's
It probably shouldn't be too surprising, then, that Amazon's revenue more than doubled between 2005 and 2008. Many analysts see more growth yet to come.
With growing demand for food around the world, combined with a fairly constricted availability of good farmland, many investors are looking for continued growth for Monsanto's super-powered seeds.
Polo Ralph Lauren and Guess? better watch out, because True Religion
Once just a small upscale player selling wholesale into places like Nordstrom, True Religion has been busy building a bricks-and-mortar presence that it hopes will turn its brand into a powerhouse. With a market cap less than $600 million, this jeans seller still has a ways to go to catch up with the likes of the fashionistas named above, but the 34% average annual net income growth it delivered for the three years ending in 2008 shows that it certainly has some hot stuff.
Is it possible to go wrong with online gaming in China? From a stock perspective, the answer is "yes" for GigaMedia
Of course, that underperformance could simply make the stock a great deal for new investors. Though the recession has hit the company's bottom line over the past year, its $184 million in revenue over the past 12 months compares pretty favorably to the $33 million that the company delivered in 2004.
Is there more growth ahead? Analysts seem to think so -- they've pegged the company's expected five-year growth rate at 20% per year.
Speaking of online games in China, let's turn to Shanda Interactive
Unlike GigaMedia, Shanda has continued to grow despite the global recession, posting a 42% jump in revenue for the first quarter of 2009. This growth builds on the average 23%-per-year top-line growth that Shanda racked up for the three years ending in 2008.
The envelope please ...
The voting is in and CAPS community members have shared their opinions. With a quick wave, we're going to usher Amazon and True Religion -- and their two-star CAPS ratings -- out of the competition. While most CAPS members seem to like Amazon's business model, many aren't too keen on the stock's valuation (it currently has a forward price-to-earnings ratio of 39). True Religion and its high-priced jeans, on the other hand, strike many CAPS members as a fad that will fizzle and send the stock plunging.
Shanda's three-star rating isn't quite as bad as the ratings for Amazon and True Religion, but it's not nearly good enough to put it in contention for this week's prize.
At four stars, Monsanto was a close runner-up in this week's race to the top. CAPS members who have been bullish on Monsanto have been excited about the entire agricultural sector -- from Monsanto's genetically modified seeds to the potash and phosphate fertilizers offered by companies like Mosaic -- and think there is a lot of growth ahead for this seed specialist.
GigaMedia, however, has a perfect five-star rating. Why so much excitement over GigaMedia's stock? Let's take a look at what Trimalerus -- one of CAPS' top-performing members -- had to say this time last year:
A solid buy at the 3-6 dollar range and I'd sell if it gets to $20 per share or so. Online gaming is highly addictive and China is a big growing market for this type of business. Even in our recession this should outperform for the next 3 years or more.
Now go vote!
Do you think that GigaMedia 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.
GigaMedia and Shanda Interactive are Motley Fool Rule Breakers recommendations. Apple, Amazon, and Best Buy are Stock Advisor picks. Best Buy is also an Inside Value recommendation and the Fool owns shares. PepsiCo is a Motley Fool Income Investor selection. Try any of these Foolish newsletters today, free for 30 days.
Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned in this article. 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.