Finding Tomorrow's Success Stories


By Amey Stone Great investing means finding high-quality companies with strong growth prospects that are selling at reasonable prices. But as any growth-fund manager will tell you, if you find a young business with vast potential to increase profits, you don't have to worry as much about its current stock price.

"Long-term, if you get the earnings right, the stock price is going to follow," says Bob Bridges, a portfolio manager and principal at Geneva Investment Management, a three-year-old Chicago firm that manages about $2 billion in assets, mostly for wealthy individuals.

"TUNE OUT THE MACRO." The firm has achieved top-ranked results by seeking out fast-growing outfits that have potential for much greater growth in the future. As of Sept. 23, its capital-appreciation portfolio was up 10% vs. 0.3% for the Standard & Poor's 500-stock index year-to-date. Audited results for that strategy (which include returns from Bridges' prior firm), show a 10-year average annual return of 16% vs. 10% for the S&P 500.

"We've always focused on picking good businesses as opposed to worrying where the overall stock market is going," says Bridges. "We pretty much tune out the macro environment and are looking for the best open-ended growth stories."

To find those open-ended growth winners, Geneva seeks companies with strong earnings and cash flow, a sustainable competitive advantage, and sound management. Past winners include Starbucks (SBUX), Whole Foods Market (WFMI), and Getty Images (GYI).

NOT HOUSEHOLD NAMES. Bridges says those companies are currently a little expensive, even for his tastes. But he identified some lesser-known names that he says are earlier in their growth cycle and attractive buys. The following are five stocks that Bridges believes have the open-ended growth prospects Geneva seeks:

Southwestern Energy (SWN)

This fast-growing energy company is focused on the exploration and production of natural gas. "They have been very shrewd managers," says Bridges, who likes the Houston-based company's high rates of internal cash-flow growth. He also notes that Southwestern Energy is developing a high-production natural gas site in Arkansas.

The Fayetteville Shale Play, as the project is known, is expensive now, but will give the outfit years of earnings visibility into the future. The stock has rocketed from $24 to $65 a share this year as the price of natural gas has climbed. But Bridges says the stock has plenty of growth ahead of it.

UTI Worldwide (UTIW)

UTI helps companies move stuff around the world, even though it doesn't own any boats or planes. Instead, it handles the logistics of moving freight -- forwarding it, dealing with customs, and otherwise smoothing the supply chain. It's a high-growth, high-return business, says John Huber, another portfolio manager and principal at Geneva. He's confident UTI will continue to benefit from growth in global trade.

"We think this is a great way for U.S. investors who want to play the theme of growth in Asia, India, and Africa, but do it with a U.S.-based company listed on U.S. exchanges," he says. UTI Worldwide shares have climbed from $68 to $75 this year. Huber thinks the business could easily triple in size over the next 5 to 10 years.

Chicago Mercantile Exchange Holdings (CME)

Geneva bought the futures exchange the day it went public -- in December, 2002 -- for $40 a share. Now it's priced at $334, and in Bridges' view, it still has lots of room to rise. "It has a natural monopoly," he says. "You can't go out and start a futures exchange."

The number of contracts traded is growing at 20% a year as the exchange has transformed from the old-fashioned "open outcry" pit environment to electronic trading. This allows for more volume and more margin expansion ahead, he says.

United Surgical Partners International (USPI)

Here's a way to play the growth in health-care spending without risking your money on a hot new drug or medical-device stock. United Surgical owns 90 outpatient surgery centers and is benefiting from demographics as well as the trend of doctors doing more procedures outside hospitals, says Geneva research analyst Jim Farrell.

United Surgical facilities enjoy high volume and have an attractive mix of procedures. Strong relationships with physicians and hospitals protect them from competitors. The company is one of Geneva's newer investments this year and is currently trading at $38, up from $22 at the start of the year.

Corporate Executive Board (EXBD)

This is consulting for the 21st century: Instead of sending out high-paid consultants to companies, this firm has its researchers study best practices in Corporate America and distributes the reports to subscribers. Not only is the product cheaper, but it's more valuable than traditional consulting, says Bridges.

The Washington (D.C.) firm boasts a 90% renewal rate and is benefiting from the "network effect," where leading companies both participate in the research and subscribe to it. The share price is at $77, up from $64 in April.

Of course, if the economy slows because of rising energy prices or some other shock, even companies that appear to have open-ended growth potential could stumble. Then, if these stocks continue to soar, they could fall just as fast in an eventual downturn. And while Geneva is a fairly new investment firm, its principals average 20 years of experience in managing money. So if hard times come, they could adjust quickly.

Stone is a senior writer and associate editor for BusinessWeek Online


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