Earlier this week, I told you about growth stocks to avoid: companies that dramatically expand their asset bases while failing to deliver strong returns on all that extra capital.

Of course, it's very hard to know how that capital expansion will work out at the time the decision is made. For investors, this generally requires a keen understanding of market trends and competitive dynamics, in addition to softer skills like the ability to gauge management vision and integrity. Chipotle Mexican Grill (NYSE: CMG)'s market underpenetration, strong unit economics, and tendency of promoting from within all factored into the Motley Fool Hidden Gems team's decision to pick this winner back in 2007.

Maybe, like me, you're less confident in your ability to see what lies around the next corner. Does this mean you can't hope to invest in stocks that are likely to compound your investment year after year? Are you confined to a life of hunting for cigar butts lying in the gutter, with just one puff or two left?

Put down the cigar butt
What if I told you that there are companies out there that manage to generate bigger and bigger cash flows, year after year, without having to plow much capital back into expansion? These businesses -- I'll dub them growth-without-growth stocks -- are out there. They generally don't come cheap, as they're obviously very special. But sometimes Mr. Market throws a fit, selling even the greatest businesses at unreasonably low prices. It happened with Coca-Cola (NYSE: KO) in the late 1980s, and Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A) was there to snap up shares. It's good to have these companies on your watch list for the next time such a broad-based fire sale comes around.

Let me introduce you to two of these growth-without-growth companies. Then we'll consider what they have in common, and how we might scour the markets for more of their kind.

An indispensable energy-services shop
I first brought Core Laboratories (NYSE: CLB) to Fools' attention back in 2007, when I dubbed it a potential core energy holding. The firm has a few lines of business that are closely tied to long-term secular trends in the oil and gas market. Integrated oil majors like ExxonMobil (NYSE: XOM) need to understand the characteristics of both undeveloped and producing reservoirs. Core Labs does that. Independents focused on onshore unconventional targets like shale need carefully designed perforating charges to maximize recovery from these tight formations. Core Labs does that, too. These must-have services led me to tap Core Labs as my top pick for 2009 -- and the stock definitely delivered.

More recently, I clued readers in to a key secret to Core Labs' long-term success: This business is extremely capital-light. Click on over to see the eye-popping quantity of excess cash flow that the firm has returned to shareholders in buybacks and dividends since 2002. Now, after screwing your eyeballs back into their sockets, check out the following table. You'll want to know going in that net operating assets equal operating assets minus operating liabilities:

Fiscal Year

Net Operating Assets (in millions)

Net Income (in millions)

Cash Flow From Operations (in millions)

Cash Flow From Investing (in millions)
















Data provided by CapitalIQ. Operating Assets were derived by subtracting cash and short-term investments from total assets. Operating liabilities were derived by subtracting total debt from total liabilities.

If this table doesn't bring joy to your heart, then you're probably a healthy, normal human being. For the investing junkies among you, it's OK to cry. I know. It's beautiful.

We're about to get meta
If oil is a murky topic for you, this one should be more familiar. MSCI (NYSE: MXB) is in the investment analytics business. Among other products, the firm provides the widely-used MSCI equity indices. There were recently $63.2 billion worth of assets, such as exchange-traded funds (ETFs), linked to MSCI's Emerging Markets index alone. MSCI collects subscription and fee-based revenue from the use of its indices, which has been growing at a rapid clip alongside the explosion in ETFs.

This business, which Harry Long brought to my readers' attention in part one of our wide-ranging interview, obviously scales incredibly well. While MSCI's net income and cash flow has ballooned since 2005, the firm has actually reduced net operating assets every consecutive year.

I haven't looked closely at how MSCI's recent large acquisition of RiskMetrics Group will affect the capital structure or returns in future years, but the business model would seem to be complementary, and similarly light on capital-reinvestment requirements. I have no idea whether MSCI will integreate that acquisition successfully. I just know that MSCI has proven it's a killer growth business up to this point.

The hunt for growth-without-growth
This rare ability to grow earnings and cash flows without increasing net operating assets is a tough characteristic to screen for using a publicly available tool like our CAPS screener. Focusing on companies with high returns on equity and high CAPS ratings might not be the worst place to start, though. That search led me to Teradata (NYSE: TDC), another asset-light business well worth studying. I know there are more of these special firms out there. If you know of one, pipe up in the comments section below.

Berkshire Hathaway and Coca-Cola are Motley Fool Inside Value recommendations. Berkshire Hathaway and Teradata are Motley Fool Stock Advisor choices. Chipotle Mexican Grill is a Motley Fool Hidden Gems recommendation and a Motley Fool Rule Breakers pick. Coca-Cola is a Motley Fool Income Investor selection. The Fool owns shares of Berkshire Hathaway and Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Fool owns shares of Chipotle Mexican Grill. The Motley Fool has a disclosure policy.