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Topics Investor 500

Best growth stocks

By Jordan Timm | May 06, 2011

Methodology: Wall Street legend Peter Lynch made his name with Fidelity’s Magellan fund, which averaged a 29.2% return in the 13 years he managed it, turning US$18 million into US$14 billion. Our formula for picking likely candidates for growth over the next 12 months is inspired by his approach. The key number here is the PEG ratio—a company’s forward four-quarter price-to-earnings ratio plus its future annual earnings-per-share growth rate.

Why you should care: The smartest plays on the board are those with PEGs less than 1, meaning you won’t overpay for earnings growth. All 10 of the growth picks above boast low PEGs. They also feature annualized EPS growth rates from continuing operations of 20% or more over the past five years.

Worth noting: Even more than in years past, resource and energy companies dominate the list, reflecting an overall bullish outlook for commodities that shows no sign of abating. Sherritt International offers an interesting play, appearing as well on our list of Best Value Stocks (page 77). Two-thirds of analysts covering the stock rate it at least an Outperform, as it develops a potentially lucrative nickel project in Madagascar. The mean analyst forecast for Sherritt’s earnings sits at $1.13 per share for 2011, up from 84¢ last year. A caveat: Sherritt missed sales estimates each quarter last year.

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