Trade in the Cheap Growth Zone

This portfolio presents analysis of inexpensive big stocks and compelling small-cap plays.
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Stockpickr member Farleydog has a portfolio, Trade in the Zone, on the site, along with his views on the cheapest value plays that have strong growth potential.

He says, "I like to trade defined risk calls on the bigger names and balance the portfolio with small-cap stocks that have a great story, good

fundamentals and open-ended potential." Some of his picks, with his analysis, include:

Goldman Sachs

(GS) - Get Report

: "They were an adviser in more than $1 trillion in deals in 2006. Revenues last quarter exceeded $200 million per business day (that's $20 million per hour, assuming a short 10-hour day for these guys). Profits were $51 million per business day in the just-reported quarter. With a P/E of just 9 and a market cap of $83 billion, this is very undervalued compared to their revenues and profits (I expect them to make over $22 per share in 2007).

They hire the best and brightest from around the world. They are buying back stock hand over fist, which should help support the stock in any downturn. If

MasterCard

(MA) - Get Report

can trade at 22 times earnings, and

NYSE Euronext

(NYX)

can trade at 30 times earnings, then certainly Goldman can trade for 12 times earnings (assumed $22 per share).

They are buying back stock like crazy. Last quarter, they averaged 210,000 shares per day. There are some good ways to use defined-risk out-month calls in this stock."

Research In Motion

(RIMM)

: "The open-end potential for RIMM is huge these next couple of years. The world is expected to have 3 billion mobile phone users next year. RIMM has just 8 million out of a potential 3 billion. I can see them getting to 16 million users quickly this year ... then doubling again to 32 million.

If (when) they get to 30 million+ users, it would still only be 1% of the world market. This is the definition of open-end potential. Their new smartphone products (Blackberry Pearl and the soon-to-be-announced Indigo and Crimson) are far cooler and more functional than everything else on the market, and the sheer size of the market is huge."

Color Kinetics

(CLRK)

: "The Color Kinetics accumulation is clearly the start of increased interest in all things LED. Just like the solar theme, energy conservation is a trend that is just starting. Although incandescent light bulbs are inexpensive, they use energy inefficiently, and environmentalists think they have made a major contribution to global warming.

Consequently, lawmakers in the U.S. and abroad are talking about banning incandescent bulbs altogether. California and Canada are banning the use of incandescent bulbs by 2012, while Australia has announced plans to ban incandescents by 2010.

CLRK is an interesting story because it doesn't have to manufacture everything -- it owns a great patent portfolio and is licensing its technology, which will allow profits to drop right to the bottom line."

Crocs

(CROX) - Get Report

: "Crocs may make some of the ugliest shoes in the world, but they are also one of the fastest-growing and most profitable companies ever. Look at this sales growth: 2004 sales -- $13.5 million; 2005 sales -- $108.5 million; 2006 sales -- $354.7 million. The estimate for 2007 is for sales of $686 million. Longer term, at least one analyst believes it has the potential to get up to $3 billion in annual sales.

How do they do it? Crocs' proprietary closed-cell resin, called Croslite, enables them to produce a soft and lightweight, non-marking, slip and odor-resistant shoe that is popular with all ages and genders. They have also entered into licensing deals with Nascar, the NFL,

Disney

(DIS) - Get Report

, Nickelodeon, Marvel & various Universities.

At a mere $30 a pair, many people buy several pairs to fit their mood (they are now selling 5 million pairs a month). Interestingly, Crocs' Croslite technology is not patented, but instead is a trade secret. The reason they didn't get a patent is so they wouldn't have to make it public, and thus share the magic formula and manufacturing process with imitators ... much like the recipe for Coke (very smart in my view).

People who spend a lot of time on their feet, like kitchen staff and nurses, live in these things. Kids beg parents to customize their shoes with little $2.50 charms called Jibbitz (Crocs bought this hugely profitable accessory company last year).

Earnings estimates should keep going up along with price targets in the days and weeks ahead. This could happen after the recent conference where they announced the new fall lineup with some higher price points and more fashionable shoes.

There is also likely to be more Wall Street coverage and support as the company has now passed fad status in a big way. I have a friend who works at

UnderArmour

(UA) - Get Report

and can tell you that they just lost a key design person to Crocs. The current highest earnings estimate for 2008 is $4 (meaning the stock sells at just 21 times the current estimate.) I think they have potential to earn $4.50-$5 next year. They have beat earnings estimates by an average of 37% the last four quarters.

More importantly, they are still being conservative on guidance, in my humble opinion. As of May 10, 25% of the float was still short (what a nightmare for those betting against these guys so far). One factor that doesn't get a lot of attention is they have a lot more opportunity outside of the U.S. than most currently realize. (They currently sell in 70 countries and this is the fastest-growing part of the company). The stock will split 2-1 on June 15."

Google

(GOOG) - Get Report

: "Google is fast becoming a very inexpensive growth stock. Its dominance in search is gaining momentum worldwide. What is also interesting is: What are they working on behind the closed doors of their corporate campus that we don't even know about yet? You can be sure it is very exciting. After a year of choppy action, I anticipate a move well above the old high of $510 in coming months. The next $100 is up."

For the rest of Farleydog's picks, including his small-cap and micro-cap picks, check out the

Trade in the Zone

portfolio.

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