7 Stocks to Maximize Returns

Let me ask you one pretty easy question: What rate of return are you expecting from your overall portfolio? 8%? 10%? 12%?

Get ready to be astounded by how wrong your expectations probably are.

What's eating away at your returns?
According to the Wall Street Journal, a nationwide survey last year reported that investors expect the U.S. stock market to return an annual average of 13.7% over the next decade.

However, we'd all be fooling ourselves if that's what we think we'll earn, because we generally forget to factor in three critical components:

• Inflation
• Expenses
• Taxes

When you consider returns after these three items, also called your "net-net-net" return, the investing landscape looks really different. That's because historically, we can expect to deduct a total of 6% for inflation, expenses, and taxes.

If you think you'll earn 13.7% a year, then you'd better start finding stocks that generate about 20% annually in returns -- no easy task!

The reality of the market
Since 1926, according to Ibbotson Associates, U.S. stocks have earned an annual average of 9.8% -- not even close to 20%.

Sure, there are some really great blue chip stocks like Johnson & Johnson or ExxonMobil: They pay dividends, have sustained bear markets, and trade at reasonable valuations. But they're never going to grow at the pace you need if you're looking for 20% returns.

And yes, there are some really unique growth stocks out there that have been able to trounce the market since their inception -- Netflix, for instance. But as of today, Netflix trades for about 47 times earnings, so even if you believe in its fundamentals, you've got to ask if it's trading at a reasonable value today.

Don't make matters worse
Feeling frustrated? I don't blame you. It's rougher out there than we'd like. But at this point, people usually choose one of two reactions, neither of which serve them well.

Some dismiss the reality of net returns and hold the course -- ensuring that they aren't going to reach their retirement goals.

Others start frantically chasing the hottest sectors or performers, maybe running after emerging markets or hoping to speculate on some dicey turnaround story. This usually results in getting in on a good market when it's already too late, or paying too much of a premium for a stock that's already seen its heyday.

Either way, these strategies are bound for failure.

The best way to maximize returns
Many investors feel comfortable investing in storied, prestigious companies like Intel or McDonald's -- and there's nothing wrong with that. In fact, both are trading pretty reasonably today, so no one would fault you for buying shares -- just don't let it encompass your entire portfolio.

If you really want to outperform the market (what that 13.7% really means), you need to dedicate a portion of your investments, maybe 30% of your equities, to companies with unlimited growth potential.

Netflix is a perfect example of a company that shook its industry and changed the entire competitive landscape. If you can find just one of these stocks, it doesn't matter how many slow-growers or mature companies you already have in your portfolio -- it can totally revolutionize your financial future.

Investing legend Peter Lynch once said, "these are among my favorite investments," and that being able to find "one or two of these can make a career."

To find them, look for stocks with the following characteristics:

• Revenue growth greater than 20% per year
• Earnings growth of 20%-25% per year
• Trading at a reasonable valuation

Increasing sales is vital to any business success, and being able to translate top-line growth into profit is why we look for earnings growth of 20-25%. This will help ensure you're buying a stock that has proven it's on a fast-track for growth. A low price-to-earnings ratio will make certain that you're not overpaying at today's prices.

I ran a screen for the attributes listed above and here are seven companies that fit the bill and deserve more of your attention:

 *CAGR = Compound Annual Growth Rate.

For example, First Solar has demonstrated, despite constant naysayers and reduced government subsidies, that it can grow both its bottom and top lines. In addition, it has a phenomenal balance sheet, with over $700 million in cash and only $160 million in debt. Although it operates in a tough and critical environment, the company has consistently outperformed analyst expectations and has separated itself as a clear cost competitor.

These are the types of qualities our Motley Fool Rule Breakers analysts look for in potential stocks, and they're beating the market by 25 percentage points on average. If you'd like to see what they're recommending today, we're offering a free, 30-day trial with access to all our past and present recommendations. Just click here for more information.

Fool contributor Jordan DiPietro owns shares of First Solar. Intel is a Motley Fool Inside Value recommendation. Ebix and First Solar are Rule Breakerschoices. Netflix is a Stock Advisor recommendation. Johnson & Johnson is an Income Investor pick. The Fool has created a covered strangle position on Intel. Motley Fool Options has recommended a bull call spread position on Ebix, a buy calls position on Intel, and a buy calls position on Johnson & Johnson. The Fool owns shares of Ebix. The Fool has a disclosure policy.