Amazon among 4 stocks built to grow

The collective wisdom of an online community is enlisted to identify companies forging momentum through the recession.

By Caps Editor Jan 8, 2010 5:05PM

This post comes from The Motley Fool's Rich Duprey.

 

A stock's price follows its earnings, which in turn follow sales. A company need only take care of its business for investors to profit in the long run.

 

So rounding up companies with rising revenues and profits, and which inspire the confidence of the analysts who cover them, should help pad our portfolio with stocks destined for long-term outperformance.

 

Below are four companies with sales and earnings that have grown by at least 20% a year over the past three years. And analysts forecast that each will grow by at least 20% over the next two years.

 

We'll then tap the investor intelligence database at MSN CAPS, the community of investors helping each other beat the market, to give us the bigger picture. CAPS is more than just the crowd's views. The opinions of the community's better-performing members do more to shape each company's CAPS ratings than the picks of their poorer-performing peers. That way, investors can intelligently use the collective wisdom of more than 145,000 CAPS participants to filter out the noise and find companies offering growth potential.

 

Here are our four stocks:

 

Amazon.com (AMZN) is one of the world's biggest retailers. Revenue has grown 31% a year over the past three years and is projected to average 26% this year and next, according to data from Capital IQ. At CAPS, the stock has a two-star rating.

 

Capella Education (CPLA) runs an online university with 20 undergraduate and graduate degree programs offered to its 26,000 students. Revenue has grown 23% a year over the past three years and is projected to average 22% this year and next, according to data from Capital IQ. At CAPS, the stock has a two-star rating.

 

Health Grades (HGRD) offers report cards on hospitals, physicians and nursing homes. Revenue has grown 24% a year over the past three years and is projected to average 25% this year and next, according to Capital IQ. At CAPS, the stock has a five-star rating.

 

HMS (HMSY) helps public programs such as Medicare identify and recover costs that should have been paid by a third party or were paid in error. Revenue has grown 44% a year over the past three years and is projected to average 24% this year and next, according to Capital IQ. At CAPS, the stock has a three-star rating.

 

Analyst predictions for corporate growth aren't a guarantee that the company will deliver, of course. But analysts' picks offer a good starting place for your own research. Before buying a stock, an investor should read the company's 10-K report and remain mindful of the stock's valuation, as well as the company's fundamentals and growth prospects.

It also pays to consult with the CAPS community. Each company's CAPS page is a fount of useful information, providing access to key financial data in addition to the insights and comments your fellow investors have offered.

 

Let's take a closer look at how one of our companies –- each of which appear to be sales and profit machines -- is regarded by investors.

 

A click away

According to Web analytics company comScore, online commerce was the big winner this holiday season, with sales in the last two months of 2009 rising by 4% from the previous year.

 

Jewelry and watches were the most popular items consumers were looking for (up 20% for the two-month period, which bodes well for Blue Nile (NILE)), followed by consumer electronics (up 15% and  a potential boon to Best Buy (BBY), which should also benefit from gift-card redemptions).

 

But when it comes to e-commerce, most people think of Amazon.com, and the Seattle retailer hit a few tipping points in the recent holiday season. The company said its e-reader, Kindle, was the most popular gift ever purchased from the company, and, for the first time ever, it sold more e-books than physical books on Christmas Day.

There are a couple of caveats, of course: We don't know how many Kindles the company actually sells, though it's apparent from the strong demand Barnes & Noble (BKS) reported with its Nook e-reader that this new niche is taking hold with consumers.

 

I doubt whether the momentum will be maintained. According to comScore, book sales rose just 6% for November and December. And I'm not convinced that Amazon represents a good buying opportunity at it lofty valuation of 51 times next year's earnings.

 

I concede that Amazon bulls present a good rebuttal, in certain circumstances. But apparently I'm not alone in worrying about the valuation, as more than a quarter of CAPS members rating Amazon expect the stock to underperform the market.

 

CAPS participant "journeyer77" says this could be the year the stock stumbles badly:

 

"While I love Amzon.com (sic), Amazon is approaching the price of Apple (AAPL) for a share of stock but its services and technology are not expanding nearly as rapidly," journeyer77 recently wrote. "I predict it to fall off in 2010 and then climb again after its price has been adjusted by the market."

 

More than 4,300 CAPS members have rated the e-commerce outlet, but we're looking for your read on the situation. Head over to the company's CAPS page and let us know whether you think Amazon is up a creek without a paddle.

 

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