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6 stocks to buy: How we picked them

The Fastest-Growing list is a wonderful window into which sectors of the economy are hot. Here's how we found a handful of good bets that should keep climbing.

By Jon Birger, senior writer
September 22, 2008: 9:50 AM EDT

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NEW YORK (Fortune) -- The 100 Fastest-Growing Companies can be a tricky place to look for stocks. To be eligible, companies must record 25% compound annual growth in both revenue and earnings for the three-year period ending June 30, as well as meet minimum requirements for market capitalization ($250 million), public-company status (shares trading continually for at least three years), and revenues and earnings (at least $50 million and $10 million, respectively, for the four quarters ended June 30, 2008).

See the full list

This year, 150 companies survived the initial screen. We then ranked the qualifiers on revenue and earnings growth but also - and this is key - on their stock returns for the previous three years. That means that in most cases, the companies' success is already priced into their stock. When we published the 2007 list of 100 Fastest-Growing Companies, for example, NutriSystem's (NTRI) three-year total return was a whopping 244%.

So you see what we're getting at: In normal times, there usually aren't a lot of undiscovered or deeply undervalued companies among the 100 Fastest Growing. The good news is that these are not normal times. Despite its outstanding growth characteristics, the average stock in the class of 2008 is down 13% through Sept. 4. The market has been especially tough on the 25 energy-related companies on the list (the most of any sector for the fourth consecutive year), which lost an average of 21% in July and August.

To us, this screams opportunity - even if you believe that the economy is in a recession or that oil prices are more likely to stay at $100 than return to $140.

Another criteria: We looked for stocks that were down by 30% or more. And we targeted stocks with a price-earnings ratio below the 27 P/E of the Russell 2000, the leading small-cap stock index. The general goal was to find stocks that had been unfairly victimized by the recent selloff, and not surprisingly, quite a few energy stocks fell into this category.

Click here for a rundown on all six of our picks. To top of page

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