Winners Circle

[tagthatstock]

Three to grow on
Commentary: Three stocks with healthy growth potential

By Ian Wyatt, Growth Report
Last Update: 8:40 AM ET Feb. 5, 2004

WASHINGTON (GrowthReport) -- The past year was without a doubt the year of the small caps. The high growth companies in this segment drove the bulls through the gates in 2003 and haven't looked back since.

This is most evident in the small cap Russell 2000 Index (RUT: news, chart, profile) which jumped 47 percent last year, the largest single-year gain in the 25-year history of the index, outpacing both the NYSE (NYA: news, chart, profile) and the Nasdaq ($COMPQ: news, chart, profile).

I look forward to the coming year and, in spite of stellar performance during 2003, believe there remain tremendous opportunities in the small cap arena for 2004.

In many ways 2003 was the year of buying high growth at any price, whereas 2004 is shaping up to be a more conservative year. Investors who diligently evaluate the cost of buying high growth companies will reap the greatest rewards.

Even the growth investor must consider the price per share for a company with a high growth rate. To do so, it is often priceless to consider a company's price-to-earnings ratio in relation to its growth rate.

Three companies that I recently revealed to my readers offer investors growth in excess of 25 percent annually, yet all appear attractive on a valuation basis -- even though shares of all three trade near 52-week highs.

Investools (IED: news, chart, profile)

Price Target: $4.00

Recent Price: $2.28 (2/4/2004)

Initial Coverage: $2.39 (1/28/2004)

InvestTools is a leading provider of education products for individual investors, and offers its products through a group of top-tier financial content companies including Business Week Magazine, CNBC, and the Motley Fool. The company's direct marketing approach targets investors in specific locales who are invited to free 90-minute educational workshops designed to sell a two-day workshop priced at $3,000. The company also uses the sessions to sell its other products including one-on-one training, investor conferences, and a $600 a year subscription service.

The company currently has 32,000 subscribers, 700,000 past and prospective customers in its user database, and to date has graduated over 90,000 individuals from its paid workshops. With nearly half of the workshop attendees becoming paid subscribers, and a 65 percent subscription renewal rate, the company's reoccurring revenues should continue to pour in.



There are three ways in which InvesTools can grow -- adding new distribution partners, developing new products, and selling additional products to current customers. To this end, Chief Executive Lee Barba expects the lifetime value per customer to jump from $4,000 today to $7,500 within the next two to three years, indicating a pipeline of new products and sales efficiencies that will facilitate an expansion of revenues at a rapid rate while increasing its profit margin.

For the nine-months, revenues increased 23 percent and the company earned 2 cents per share. For the full year, the company has provided guidance calling for top-line growth of 19 percent to 31 percent over 2002. I believe the company will increase revenues by 25 percent in 2004, equating to somewhere around $90 million. Meanwhile, I expect net profit margins will increase to 10 percent by the end of 2004.

A comparison to both financial content and education companies indicates that shares are very attractive, carrying an enterprise value to sales ratio of 1.44 vs. 3.5 for its peers. At a conservative multiple of two times sales, we arrive at a price of $4.00.
http://www.marketwatch.com/news/yhoo/story.asp?source=blq/yhoo&siteid=yhoo&dist=yhoo&gui...