Money Matters - Simplified

This Stock Could Make You Rich

History proves that, while low-priced businesses can make for good returns, reasonably priced great businesses can make you rich.

By "great businesses," I mean those that are growing fast in important industries. These are the millionaire makers, emerging multibaggers that dour analysts often proclaim as overpriced but which produce massive returns on invested capital. Some winners that you might recognize:

This Stock Could Make You RichGet original file (14KB)

Company

Recent Price

5-Year Revenue Growth

ROIC

5-Year Return

Intuitive Surgical (Nasdaq: ISRG)

$107.27

57.0%

16.0%

494.9%

Quality Systems (Nasdaq: QSII)

$39.29

28.0%

33.4%

260.1%

Oceaneering International (NYSE: OII)

$30.61

25.8%

16.0%

88.9%

Sources: Motley Fool CAPS, Capital IQ, a division of Standard & Poor's, and Yahoo! Finance.

Outsized growth is what made investors in these stocks rich. These stocks were worth paying for, as the best almost always are -- high P/E multiples be damned.

Investors have always placed far too much faith in the shorthand of multiples. We don't recognize that a stock trading for more than 100 times earnings can be cheap, as Celgene (Nasdaq: CELG) was in 2004, before it quintupled. And we forget that Green Mountain Coffee Roasters (Nasdaq: GMCR), one of the 10 best stocks of the past decade, traded for as much as 76 times earnings in 1999.

Why? Of the 317 stocks listed on major U.S. exchanges that recorded a positive return last year, 53 entered the year trading for more than 30 times earnings, including Eldorado Gold (NYSE: EGO).

What's more, Foolish co-founder David Gardner frequently selects great businesses at reasonable prices for our Motley Fool Rule Breakers service and for his Motley Fool CAPS portfolio. CAPS is a 125,000-strong stock picking community; David's picks rank him in the top 2% of investors there.

Hunting for the next millionaire-maker
So if paying up for growth works, why not do it more often? I suppose because doing so poses risks. Overpriced growers can fall faster than their (ahem) "cheaper" peers. Plus, betting on growth alone is dangerous -- any company can enjoy a short burst of unexpected success.

We want to pay up for businesses that are positioned for long-term growth -- firms that already have a history of high growth, are expected to maintain that pace for at least the next two years, and produce above-average returns on capital.

So, using those characteristics, I ran a screen at Capital IQ that returned 109 potential winners. My favorite of the list will surprise no one: Apple (Nasdaq: AAPL), which has a massive following in our CAPS community:

Metric

Apple

CAPS stars (5 max)

****

Total ratings

21,399

Percent Bulls

92.1%

Percent Bears

7.9%

Bullish pitches

4,275 of 4,752

Data current as of Feb. 17, 2009.

The bulls have many reasons to snort. The Apple Store is one of the most successful retail ideas ever. The iPhone was the top U.S. handset in the third quarter last year. And Macs continue to gain market share.

"How can I not weigh in on the most-rated stock on CAPS? You definitely have to pay a premium to ride the [Apple] train, but with the strength of the brand and products right now I'd rather be on that train than in front of it," wrote Foolish colleague Matt Koppenheffer, a.k.a. TMFKopp, yesterday.

Me too. After suffering through a harsh January during which CEO Steve Jobs announced a six-month medical leave, shares of Apple have surged 20% off their lows. But I see room for further gains. After all, more than 30% of the iEmpire's market value is denominated in cash and liquid investments.

Copyright © 2008 Universal Press Syndicate.