Color to the Numbers: Top Small-Cap Growth Stocks

Thanks to the Internet in general, and sites such as Yahoo! Finance and MSN Money in particular, investors have more tools than ever to search for stock ideas by running screens of stock databases. But screens often return numerous stocks that need to be weeded out because the numbers don't tell the whole story. Maybe the massive growth at one company was a result of one-time tax adjustments and not core operations. Or maybe the screen didn't include the latest announcement that a dividend was canceled.

So just like the color-by-numbers books that kids doodle on, the picture for stocks from any screen doesn't become clear until we add the appropriate color to the page. In this edition of "Color to the Numbers," we'll enlist Motley Fool CAPS to take a Foolish look at a screen for small-cap growth stocks to see which ones may be worth investigating further, and which ones you'd be better off casting aside.

Better a screen than a window
The community of knowledgeable investors who rate stocks in CAPS will help us in our search for small-cap growth stocks. By pulling up a quote on a particular stock in CAPS, investors can see at a glance how the collective community rates a company today. Investors can also see how the very best All-Star stock pickers -- CAPS players with a ranking above 80 -- rate a given stock. You'll even find pitch commentary and blogs that give details behind the bull and bear opinions. All of these tools give investors much more in the way of qualitative resources than just numbers and tables.

So let's take a look at our small-cap growth screen for today and a handful of the top stock candidates it returned. To run this screen, we'll use the following criteria:

• Market cap between $100 million and $1 billion.
• Estimated growth rate in earnings per share for the next five years of at least 25%.
• Revenue growth for the current year to date of at least 30%.

This should give us the cream of the crop in terms of small-cap stocks that already have a developed performance record that is expected to continue. The combination of the EPS growth estimate and the minimum revenue growth target will give us stocks expected to profitably capitalize on an already thriving business. Understanding what's behind these high expectations for growth is where CAPS can really help.

Opinions with the numbers
Here's a sampling from the list of stocks our screen pulled up today.

It shouldn't be much of a surprise that the list of high-growth small caps has at least a few medical and biotech concerns. LifeCell, Cynosure, and CV Therapeutics are all developing products and technology to improve lives.

LifeCell and Cynosure develop products for the loosely defined "reconstructive surgery" market. This includes elective cosmetic surgeries as well as procedures done for accident victims, such as reconstructing burned skin. LifeCell develops the actual replacement tissue products used in surgery, and Cynosure builds equipment used for cosmetic treatments, such as hair and cellulite removal. CV Therapeutics operates in a different segment, as a pharmaceutical company developing cardiovascular medicines.

CAPS investors have different outlooks on each company, however, relating to the companies' growth and risk prospects. Cynosure gets the highest rating possible in CAPS -- five stars -- because of its differentiated products that make cosmetic procedures less invasive with faster recoveries. An eye-popping 58 of 59 CAPS All-Stars think the rapid adoption of Cynosure's laser products will help it outperform the S&P. LifeCell, meanwhile, sports a favorable four-star rating; its unique solution of tissue reconstruction has led to dramatic 40% revenue growth in the past year. CAPS investors hedge slightly on this volatile, early-stage company, though, as it tends to be overly generous with stock-option grants.

CV Therapeutics gets a below-average two-star rating from the CAPS community, partly because of the high risk involved in developing blockbuster drugs. A recent hiccup is testament to this risk -- the company is making dramatic cuts to expenses after results from testing led to reduced expectations for its acute coronary treatment Ranexa. CV also has years to go before it is even profitable; it made the screen only because its losses are expected to dramatically reduce over the next five years. And competition from giants such as Pfizer (NYSE:PFE) always looms over small biotechs -- another reason why 10 of the 85 CAPS All-Stars issuing an opinion on CV Therapeutics are bearish on the company.

Another bottom-dweller on our list of high-growth small caps is video media technology provider DivX. Of the 353 CAPS players ranking this company, 38 see red flags and have given it the thumbs-down. Here again, looming giants in the space for video codec standards such as Microsoft (NASDAQ:MSFT) and Real Networks give investors reason to think DivX's growth may not last. And also here again, we see great numbers, but the color behind them tells a different story.

Let 30,000 investors be the judge
The collective wisdom of a huge pool of investors can quickly add color to a whitewashed page of numbers. But even with an entire community of qualified opinions acting as the judge, individual investors are still the jury and should perform their own research.

Want to see your favorite screen results get run through the wringer in the CAPS community? It's free to tap the knowledge base and even give your own opinion. Join the discussion at Motley Fool CAPS today!

Microsoft and Pfizer have made the list as recommendations in the Motley Fool Inside Value newsletter service. To see just how the average stock selection is beating the market by 7 percentage points, check out a free 30-day trial today.

Fool contributor Dave Mock does his best to color within the lines, but reserves his right to artistic expression. He owns no shares of companies mentioned here. GigaMedia is a Global Gains pick. CV Therapeutics is a Rule Breakers pick. Omniture is a Stock Advisor selection. Dave is the author ofThe Qualcomm Equation. The Fool's disclosure policy doesn't see color or the wart on your nose.