Stock Watch


5 Great Growth Stocks

Kathy Kristof

Even in a sluggish economy, they’re piling up sales.



The companies you’re about to read about appear to have little in common. Some are huge, some small. They operate in fields as diverse as security and content creation. But what connects them all is that they are using technology to spur blistering sales growth. Why is that important? Because after zealously trimming fat in recent years, companies are limited in how much they can boost earnings by slashing costs. So one sure way to identify firms with brisk profit growth is to identify those that can generate rising revenues in good times and bad.

See Also: A Growth Fund for Spicing up your Portfolio

To be sure, some of the five stocks described below look pricey by traditional measures. That shouldn’t be surprising, says Russ Koesterich, Black­Rock’s chief investment strategist. “When you see companies growing rapidly in a slow economy, you know that they are in an attractive niche market or they are gaining market share,” he says. “Either way, companies with rapid top-line growth are worth a premium price.”

Consider Qualcomm (symbol QCOM), which was founded in the mid 1980s with a mission to make it easier to communicate in remote areas. Qualcomm developed a satellite communications system, initially to help truckers track their fleets, and started patenting its technology. That technology is now a cornerstone of wireless communications. The San Diego company earns royalties from wireless-phone makers all over the world. “Qualcomm is platform-agnostic,” says analyst James Ragan, of Crowell, Weedon & Co. “You don’t have to care who wins the cell-phone wars; it makes chips for all the operating systems.”

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Qualcomm’s shares stumbled in late April, after the company issued an earnings forecast that wasn’t quite as rosy as some analysts had expected. As a result, the stock is now in bargain territory, selling for 14 times estimated earnings for the fiscal year that ends in September.

Search star Google (GOOG) is another giant with sizzling revenues and profits. The undisputed leader in Internet advertising promotes innovation by giving its employees the equivalent of one day a week to work on their pet projects, some of which the Mountain View, Cal., firm turns into new products and services. As a result, Google is now into everything from e-mail and maps to cars that drive themselves and eyeglasses that double as mobile computers.

But Google has never become so distracted by new ventures that it ignores its core business of Web search and advertising. Google’s first-quarter revenues soared 31% from the same period in 2012, and profits jumped 16% — the vast majority coming from Web ads. The stock sells for 18 times projected 2013 earnings, a reasonable price-earnings ratio for a company that’s expected to produce earnings growth of 15% annually over the next few years. UBS analyst Eric Sheridan thinks the stock will hit $945 in a year.

At the other end of the size and profitability spectrum is Angie’s List (ANGI), the vetted listing of service-provider reviews launched by an Ohio woman who was frustrated in her search for a good contractor. Angie Hicks ramped up national expansion after offering shares to the public in November 2011. Now based in Indianapolis, Angie’s List has spent a fortune on advertising to get a firm foothold in major markets around the country. The outlay is necessary to introduce the service to the roughly 30 million households that are seen as potential paid subscribers to the site, which already boasts some two million clients.

Raymond James analyst Aaron Kessler thinks the number of memberships could easily triple over the next few years, feeding a virtuous cycle. Subscribers become reviewers of the people they hire. As the site accumulates more reviews, it becomes more valuable to both subscribers and paid adver­tisers. Unlike Yelp, where advertisers complain of “too many tire-kickers,” Angie’s members are serious buyers, Kessler adds. That has led to dramatic growth in the number of contractors willing to buy ads and helped fuel stunning revenue growth, from just $90 million in 2011 to an estimated $247 million this year. The company is losing money, but analysts expect Angie to earn 31 cents a share next year and 89 cents in 2015.

Like Qualcomm, Aruba Networks (ARUN) is all about keeping people connected. However, Aruba’s goal is to help companies keep their workers connected with their colleagues on a variety of devices — such as computers, phones and tablets — even when they’re on the go or using a personal device. Aruba’s products are designed to do that without sacrificing connection speed or the employer’s companywide security. That’s a tall order, but analyst Rajesh Ghai, at Craig-Hallum Capital Group, thinks Aruba does it better than even such big, well-known rivals as Cisco Systems and Hewlett-Packard. Aruba continues to gain market share in a rapidly growing business. That has fueled double-digit revenue growth, including a 22% gain in the first half of the fiscal year that ends in July 2013.

Profits have often been elusive, partly because Aruba must invest heavily to develop new technologies to maintain its competitive edge. But in the quarter that ended January 31, the Sunnyvale, Cal., company earned 4 cents per share, and analysts expect rapid earnings gains in the future. The stock trades at a lofty 27 times estimated 2013 earnings, but Ghai considers the price reasonable given Aruba’s prospects.

Cybersecurity has long been a hot topic in government circles, and it has become a Main Street topic as major corporations increasingly see malicious hackers attack their Web sites. That’s created opportunity for Sourcefire (FIRE), a 12-year-old cybersecurity firm that got its start protecting the government from electronic intruders.

Sourcefire develops complex algorithms that try to determine if a Web visitor is malicious. Suspicious traffic is then blocked or sidelined to areas where it can’t do damage. The Columbia, Md., company’s strong relationship with the open-source community — a loosely linked cadre of tech wizards who help each other find program glitches and solutions — also gives it a jump on its more secretive competitors, says William Blair & Co. analyst Jonathan Ho. The stock sells for a sky-high 56 times projected 2013 earnings. However, with both revenues and profits expected to grow by more than 20% annually over the next few years, the stock should still outperform the market, says Ho.



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