As important as valuation is in picking top investments, you won't get the long-term blockbuster returns you want from your stocks unless you seek out growth companies. While value investors can eke out decent money by buying stocks when they're beaten down and selling them off once they've returned to a reasonable value, growth investors who correctly identify top-growing companies now can reap fortunes after that growth happens.
Admittedly, the Dow Jones Industrials (INDEX: ^DJI) may not seem like the best place to look for fast-growing stocks. Most people think of the Dow as being filled with stalwart has-been companies whose best days are behind them. But even well-established companies can pack a wallop in the growth department under the right circumstances.
Later in this article, I'll reveal the Dow stocks with the fastest expected growth rates for 2012 -- as well as the one that I'm going on record in picking as my favorite. But first, let's look at the impact that growth can have on your investing results -- and why fast growers are worth seeking out.
A time for growth
With the market on shaky ground recently, many investors have gravitated toward less volatile stocks and away from growth. Although fast-growing stocks can rise strongly during bull markets, they often come tumbling down to earth just as quickly when things go wrong. The recent experience of stocks like Green Mountain Coffee Roasters is a good example of how strong growth builds great returns -- returns that can disappear in an instant with a single piece of bad news.
But when the stock market trades at depressed levels, growth stocks truly shine, even though it takes an iron will to buy them. Look back to early 2009, and the best performers during the recovery were growth stocks -- stocks that many investors had completely written off as potential total losses.
With worries in Europe as well as closer to home, few people seem to think that the stock market can rally from here. Often, though, those moments of maximum pessimism prove to be a turning point for growth stocks. If you can overcome the fear and buy potential growth stocks on the cheap, it can often be the best move you could make.
Grab the growth while you can
Picking growth stocks from the Dow has the dual benefit of giving you blue-chip stocks that have stood the test of time in previous economic troubles on top of potentially higher earnings down the road.
So with that in mind, let's take a look at the Dow stocks with the highest expected earnings growth rates in 2012:
Expected 1-Year EPS Growth
Caterpillar (NYS: CAT)
Alcoa (NYS: AA)
Chevron (NYS: CVX)
ExxonMobil (NYS: XOM)
Bank of America
Source: S&P Capital IQ. As of Jan. 3. NM = not meaningful because of negative earnings.
Looking at these stocks, I can make a number of observations. The most obvious is that expected growth from energy stocks Chevron and Exxon naturally depends on the sustainability of current oil and natural gas prices. In particular, a big jump in natural gas would help both companies, because both Exxon and Chevron have made major acquisitions of natural-gas companies in recent years. Those moves have largely held back the oil giants until now, but a bounce in gas could finally pay off for them.
On the other end of the spectrum, Alcoa and Bank of America got hammered hard last year, as both face challenges to their very survival. In Alcoa's case, a global economic slowdown poses concerns about the infrastructure growth driver that it sees leading to a doubling in aluminum demand by 2020. Similarly, Bank of America has been under fire to raise capital, but if Europe can avoid a big banking meltdown, the shares could come back strongly.
To me, though, Caterpillar stands out among these stocks. The same cyclical concerns have some people convinced that Cat's best days are behind it, but the industrial giant already posted strong growth in 2011 and appears poised to continue that trend. With results that have repeatedly beaten expectations, Caterpillar is, I think, the best stock of these five -- and that's why I'm making a CAPScall on Caterpillar to outperform the S&P 500 this year.
Room to grow
Growth stocks may be scary right now, but they have huge potential. In times like these, you can't afford to pass profit opportunities by.
You can also find some great growth stocks outside the Dow. In fact, in our brand-new free report, "The Motley Fool's Top Stock for 2012," we reveal a stock name that has some smart growth opportunities. Grab your free copy today before it's gone.
At the time thisarticle was published Fool contributorDan Caplingeris still hoping for a big growth spurt. You can follow him onTwitter. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Bank of America.Motley Fool newsletter serviceshave recommended buying shares of Chevron. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Fool'sdisclosure policygrows with you.
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