Secrets of FORTUNE's Fastest-Growing Companies When you're moving at this speed, you have to keep your eyes on the road. Here's how the winners on FORTUNE's annual list of fast-growing companies keep their earnings--and their stock prices--from crashing.
By Nelson D. Schwartz Reporter Associates Cora Daniels, Deirdre Lanning, Tyler Maroney, Natasha Tarpley

(FORTUNE Magazine) – There's no denying the thrill of speed. Who hasn't pushed the accelerator on a clear stretch of road just to feel the surge of power? To both driver and passenger, a fast car is a screaming adrenaline rush. Of course, speed has its perils. Hit a pothole at 90 miles per hour and you won't be changing a flat. You'll be spinning wildly out of control.

Fast cars. Fast companies. The same principles apply. Even the best drivers can lose their way trying to control costs, hire new employees, satisfy customers, and please the Street. For the passengers, the ride can be even more jarring. A mere rumor can send investors' shares skidding. Indeed, Wall Street is littered with the wreckage of one-time darlings like Boston Chicken or Iomega, companies whose early promise was never fulfilled by long-term results.

That's what makes this year's list of FORTUNE's fastest-growing companies so remarkable. Not only have these 100 businesses posted staggering gains in profits and revenues, but many have also produced impressive returns for investors. In fact, two-thirds have outperformed the surging S&P 500 index over the past three years, a notable achievement when you consider that most small companies have badly lagged their bigger brethren. While the S&P has risen 28% annually over the past three years, the typical company here has returned 39%. And if that isn't enough, consider this: If you'd put $1,000 in each of the top 20 companies on this list on June 30, 1996, you'd have $136,184 today. If you'd invested in the S&P instead, you'd only have $41,541.

Despite those impressive stats, what you won't find on this list are a whole lot of buyhere.com Internet stocks. There's a simple reason: Our companies actually made profits over the past three years. Since 1996 the median company on our list has seen revenues jump 331% and profits leap 388%. As always, to get on the list a company needed both sales and EPS growth of at least 30% each year over three years. Then, for the first time, we also factored in the companies' stock market returns since 1996.

This extra step brought some hot stocks to the top of the chart, but bear in mind that not every company on this list is a great investment. Some have already hit that pothole. In fact, 42 of our companies saw their stock price decline over the past 12 months. They may be facing slowing revenue growth, or fighting competition from larger rivals, or simply be part of an industry that's fallen out of favor on Wall Street. Despite posting strong results, homebuilder Meritage (No. 2), for example, has seen its share price fall nearly 25% since early January amid an overall drop among real estate developers. And Labor Ready (No. 7), a Tacoma company that provides manual laborers for temporary jobs, has seen its stock jump up and down wildly as short-selling hedge funds took aim at the company. Whatever the reasons, those are the risks of high-growth stocks. These companies are not for the slow-lane investor.

Or the slow-lane manager. The typical fast-growth company is bursting at the girders. Unpacked boxes line the new office of Irwin Jacobs, chairman of Qualcomm (No. 16), but plans are already being drawn up for a new building across the street to accommodate the company's rapidly growing work force. At MiniMed (No. 55), parking is so scarce that the company was forced to lease land along a nearby railroad track so that new employees would have a place to put their cars.

How do these companies manage their growth? On the surface they seem to have little in common. There are tech shops, toymakers, a railroad operator, even a heavy-truck manufacturer--all with distinct cultures. Take Siebel Systems (No. 1), which produces software that helps corporate clients manage their sales, customer service, and marketing efforts. Although the company is located in the heart of Silicon Valley, founder Tom Siebel and other top execs love nothing better than to defy the let-it-all-hang-out local culture. At Siebel's San Mateo, Calif., headquarters, jackets and ties are required for anyone who comes into contact with customers, and office doors must remain open at all times. As Howard Graham, Siebel's no-nonsense CFO, puts it: "Showing up for work in sandals and a T-shirt is just not professional."

Several hundred miles to the south, outside L.A., at videogames seller THQ (No. 3), CEO Brian Farrell doesn't bother with ties, let alone jackets. At the company's test facility, a caffeine- and snack food-fueled crew of teenagers and twentysomethings pulls all nighters testing THQ's new games for prime time. Computer consoles are piled high with empty doughnut cartons, teriyaki sauce containers, and other remnants of what pass for nutrition at THQ.

But style aside, these 100 companies are not so dissimilar. In meetings with CEOs, interviews with Wall Street analysts, and conversations with employees, we discovered some strikingly similar traits. Whether you design semiconductors, create software, or sell toys, there are certain things you need to know, such as how to talk to Wall Street, that can make all the difference. We've identified seven secrets of successful fast growers, and we think that looking out for these characteristics will help managers who want to run--and investors who want to buy--the next Dell Computer. Not the next Boston Chicken.

THEY'RE NEVER LATE

Bob Cutter couldn't believe his eyes. As the executive responsible for making sure Vitesse Semiconductor's (No. 11) new production facility in Colorado Springs opened on time, he'd been battling constant construction delays. But when a freak spring blizzard dumped three feet of snow and turned his construction site into a mud puddle in April 1997, it seemed like the final straw.

Trucks delivering air filters and chipmaking machines couldn't get near the unfinished building. Cutter knew that waiting for the ground to dry would push back the opening of the factory by at least a few weeks, jeopardizing the profits that Wall Street was counting on in future quarters. So within hours of the snowfall, Cutter and his contractors came up with a solution: Dump 1,500 tons of gravel on top of the mud to create a makeshift driveway. Trucks were soon delivering their equipment, and by the end of the year, the new fab was churning out very profitable high-speed communications chips.

"If we'd come out and said we missed our number because the equipment couldn't get through, our stock would have been slaughtered," says Chris Gardner, vice president and general manager of Vitesse's telecom division. The future of the company was riding on the new plant. What's more, so was the bonus of Bob Cutter and other top execs, which was tied to opening it on time.

Determination to deliver products on schedule is a big reason Vitesse has been able to meet or beat Wall Street's earnings estimates in each of the past 16 quarters. And it's been rewarded: The stock price is up 89% since last year.

When corporate execs can't get their act together in time, Wall Street is merciless. Just look at Rainforest Cafe (No. 43). Delayed restaurant openings and disappointing same-store sales help explain why shares of this jungle-themed restaurant chain have dropped nearly 40% annually over the past three years, even though revenues have been growing by more than 100% a year. So if you're looking for a company that can handle its torrential growth, make sure it's serious about schedules and doesn't have a history of missing earnings estimates. Better late than never doesn't wash on Wall Street.

THEY DON'T OVERPROMISE

As the very different records of Vitesse and Rainforest show, it's critical that executives deliver what they promise to Wall Street. At the same time, it's just as important that young companies resist the temptation to promise too much.

"Wall Street tries to make you get ahead of yourself," says Brian Farrell, the CEO of THQ. "If you grow earnings by 15%, the first thing they ask is whether you can do 25% the next quarter." For CEOs, it's tempting to say yes and then look for one-time gains. After all, analysts love to hear confident predictions. But it's better to keep estimates within reason and put money back into the company, says Farrell, even if that means sacrificing a short-term run-up in the stock. As Farrell notes, "You can't run your business by looking at the stock price on your computer screen."

Alfred Mann doesn't. As the founder and chairman of MiniMed (No. 55), a Sylmar, Calif., maker of devices that help diabetes patients manage their insulin levels, he has watched his company grow from a small startup to a powerhouse with a market cap of more than $2 billion. And while recent profit growth has been impressive, it could have been even better if not for MiniMed's investments in R&D. "We make sure we meet Wall Street's estimates for the bottom line," notes Mann. But he would rather use extra money to develop groundbreaking new products, like an internal insulin pump and glucose sensor that may eventually help diabetics avoid having to constantly check the level of sugar in their blood. Indeed, in 1998, MiniMed spent $16.5 million on R&D--$3.5 million more than its total profits that year.

In spite of that big investment in research, MiniMed's earnings have grown by 59% annually over the past three years. And what about MiniMed's stock? Well, it has done even better, rising 210% over the past 12 months.

THEY SWEAT THE SMALL STUFF

Sitting in his Malibu, Calif., office with a picture-perfect view of the Pacific Ocean, Steven Berman doesn't look like the type who counts pennies. With a deep tan, moussed hair, and an oh-so-hip monochrome gray suit, tie, and shirt ensemble, the 34-year-old Berman looks more like a guy who has a corporate jet fueled and ready on the tarmac. But in fact, Berman, president and co-founder of toymaker Jakks Pacific (No. 9), is proud of being cheap.

Each month Berman reviews the FedEx invoices of each of his company's seven divisions, to see if the expensive overnight service was justified. "This might seem small, but it adds up," he says. "People use FedEx automatically after a while, even if it's not necessary." And as for flying, well, don't get Berman started on first class. Jakks toys are made, for the most part, in China, but when Jakks execs travel to offshore factories they buy economy tickets, even if it means 15 hours in a knee-to-chin tuck. (Berman, who dutifully flies coach himself, does let employees use their frequent-flier miles for free upgrades.)

It pays to economize in the toy business, where margins are tight and competition is fierce. It's especially critical at Jakks, which has been able to spur growth by selling its toys at low prices--most go for less than $10. One Jakks bestseller: an action figure of wrestler "Stone Cold" Steve Austin that "sweats" drops of water. Berman's tough line on costs has paid off. While Jakks' sales roughly doubled in the first half of 1999, profits were up threefold. Not surprisingly, Jakks stock has been performing "Stone Cold"-like feats of strength: It's up 169% in the past 12 months.

Qualcomm's (No. 16) profits and stock price (up 392% in the past year) have soared in part because its managers sweat about the really small stuff, like ball bearings. When the cellular giant manufactured its first generation of phones four years ago, explains Qualcomm engineer Howard Kukla, it took a team of 60 workers three hours to build each one. Qualcomm simplified the design, eliminating ball bearings, springs, and pins, and now 16 workers can now turn out a phone in just 15 minutes. "You may think a second or two doesn't matter," says Kukla, "but when you're talking about the volume of phones we're making here, it makes a difference."

THEY BUILD A FORTRESS

Talk to a professional investor who really knows small stocks, and you're likely to hear one phrase over and over again: barriers to entry. That's because most small firms, especially in the technology arena, don't have them. And that means they're vulnerable. Young businesses lack the economies of scale and the established customer relationships their bigger competitors enjoy, so they're easily crushed. Investors should be on the lookout for companies in niches where the barriers to entry are high and the threat of new competition is low.

That's precisely the case with several of our top performers. MiniMed, for example, now controls more than 80% of the market for insulin pumps. That gives it a tremendous lead over competitors. What's more, any potential rival would have to spend years navigating the FDA's arduous regulatory system, which would further strengthen MiniMed's dominant position. That's why President Terrance Gregg likes to put money into R&D and hiring more salespeople. "This may compress our earnings a bit, but it builds a wall around us that a competitor can't break."

Rexall Sundown (No. 88), based in Boca Raton, Fla., learned the hard way how quickly big companies can invade your niche when there is no wall. A maker of vitamins and nutritional supplements, Rexall prospered as herbal remedies like St. John's wort and ginko biloba became the rage. Of course, established vitamin giants such as American Home Products (Centrum) and Bayer (One-A-Day) saw an opportunity and launched their own lines of herbal supplements last year. The results were predictable--the increased competition and slower sales growth across the industry hammered Rexall's stock. Shares of Rexall have dropped more than 40% over the past 12 months.

"Anyone who sells consumer products or pharmaceuticals can enter this business as long as they have the manufacturing capacity," says one analyst who covers the stock. "You don't have to get a patent, and you don't need FDA approval." Rexall has launched new products and boosted its ad budget in a bid to get back some of its old momentum. But shareholders shouldn't get their hopes up. In fact, they'd probably be better off taking some St. John's wort to ease the depression over their Rexall stock losses.

THEY CREATE A CULTURE

An outsider walking into Siebel Systems knows right away that this is a rule-driven company. There are the mandatory jackets and ties, and the only illustrations in the hallways are the logos of Siebel's corporate customers. Woe to the product manager who sneaks in a slice of pizza. "This isn't a five-floor cafeteria," snorts CFO Howard Graham when I hint that maybe eating lunch at your desk isn't an abomination. "Nobody's eating a bowl of curry or a plate of lasagna in their workplace here."

Co-founders Tom Siebel and Pat House sat down and consciously planned this corporate culture before launching the company in 1993. They wanted the atmosphere to say, "We are professionals." And slurping soup over a keyboard, they felt, was not professional.

The crucible for Siebel Systems' culture, ironically, was Oracle, the database-software giant where Siebel worked for over six years. Led by Larry Ellison, one of the most flamboyant tech CEOs around, Oracle has a reputation for aggressive sales tactics that occasionally rub people the wrong way. Siebel wanted his company to be just the opposite. That's why 40% of the pay of Siebel's salespeople is based on customer evaluations rather than on the straight commission that's typical elsewhere. Even the conference rooms are named for customers, which is why you'll hear Siebel staffers say things like "Let's meet in Kellogg."

The intense culture is a big reason Siebel has been able to grow so quickly and still stay focused. It also helped the company win very big deals--its contracts average $500,000 each--from old-line FORTUNE 500 giants like Ford, Lockheed Martin, Chase Manhattan Bank, and of course Kellogg. Plus it's gaining customers at a remarkable clip, signing on more than 100 new clients in the latest quarter.

And if Siebel's hard-charging employees aren't always having a ball, well, they can take comfort in the fact that they're getting rich. Shares of Siebel have risen a stunning 1,200% since the company's IPO, making millionaires out of scores of the company's early employees.

If the typical Siebel exec showed up at the offices of American Eagle Outfitters (No. 16), he'd probably be advised to loosen up, turn on Limp Bizkit, and don some Canvas Utility Pants. A specialty retailer whose clothing and accessories are aimed at the Dawson's Creek set, American Eagle tries to create a corporate culture that reflects the tastes of its young customer base. "We're very focused on our brand, and the culture encourages that," says CFO Laura Weil.

It wasn't always like this. American Eagle has been around since 1977, but six years ago management decided to develop and sell its own line of clothing and accessories for buyers aged 16 to 34. So it set out to consciously inject that generation's lifestyle into its corporate culture. At the company's loft-like design center in Manhattan, reggae and rock play in the background while twentysomething designers come up with new products such as beaded hemp necklaces and multicolored head scarves. Last month American Eagle sent two designers to Woodstock '99 to take pictures and generate ideas. And at the company's Pittsburgh headquarters, execs are encouraged to wear American Eagle's casual line.

The company's laid-back Generation Y image has obviously touched a chord--profits have risen by more than 200% annually for each of the past three years, and American Eagle shares have gained nearly 125% annually.

THEY LEARN FROM THEIR MISTAKES

Jack Friedman, the chairman and CEO of toymaker Jakks Pacific, has an unusual claim to fame: He founded not one but two of the top ten companies on our list. Six years before he started Jakks Pacific, Friedman launched No. 3 THQ, the videogame maker. Don't get the idea, however, that Friedman has always had the Midas touch. When he left THQ in 1995 it was on the verge of bankruptcy, and its shares were trading below $1. It is only since Friedman left and Brian Farrell took over that THQ has staged its remarkable comeback.

To his credit, Friedman has learned from his mistakes, and that's an important reason Jakks Pacific has done so well. "The highs at THQ were pretty high, but the lows were too low," he says ruefully. At THQ, Friedman frequently swung for the fences, making big bets on games he hoped would be smash hits. He did hit a few long balls, but they didn't make up for the frequent strikeouts. Jakks Pacific, on the other hand, focuses on products that are established sellers, like the WWF wrestling figures, instead of going for tie-ins to the latest hot film. This way he avoids the perils of predicting which movies will be hits, like A Bug's Life, and which will be outright duds, like Babe: Pig in the City.

Friedman had to start a new company to apply the lessons he learned at THQ. But managers don't usually have to go to such extremes. Sometimes it is just a matter of paying attention along the way. Like many companies on our list, Armor Holdings (No. 22), which sells riot-control equipment to law-enforcement customers and advises companies on security, has grown primarily by swallowing up smaller firms. After making 15 acquisitions over the past three years, Armor learned to be more choosy. "In the early days we expected too much," says CEO Jonathan Spiller. "We thought we could change the corporate culture very quickly and make big cost savings right away, but the old management sometimes resisted." Now Armor makes sure any potential target's execs sign on to Armor's plan of action, even if that means passing up some opportunities.

THEY SHAPE THEIR STORY

Small, fast-growing companies are particularly vulnerable to the Wall Street rumor mill. So it's critical for them to make sure their message to investors is clear. Zivi Nedivi, CEO of Kellstrom Industries (No. 20), which supplies aircraft parts, knows this. He inadvertently sent investors fleeing when he said he would announce his company's latest earnings a bit early last February at a big meeting of Wall Street analysts and investors. Unfortunately, Kellstrom's accountants couldn't finish their quarterly audit in time (violating Secret No. 1), so Nedivi postponed the earnings announcement. Rumors began to fly that the company was poised to disappoint Wall Street's estimates by a wide margin. When earnings were announced about a week later, they actually beat expectations. But by then shares of Kellstrom had fallen roughly 20%; the company still hasn't recovered.

"When there is uncertainty with this kind of small, growing company, the first thing people do is run," says John Pincavage, a veteran analyst with Warburg Dillon Reade. "And when one money manager sees someone else bailing out, his first thought is, 'What does that guy know that I don't?' They don't wait around to find out what's really going on."

Smart companies do damage control to head off big losses. Qualcomm lost several major orders from South Korea, its largest overseas market, after Asia plunged into recession in 1997. The bad news meant a 50% shortfall in profits--the kind of earnings disappointment that can halve a company's market cap overnight.

Almost soon as Qualcomm execs became aware of the problem, however, Chairman Irwin Jacobs issued a press release outlining exactly what had gone wrong and explained to analysts that the troubles in Korea wouldn't affect the company's long-term growth rates. Qualcomm's stock did fall 18%, but Jacobs' quick, straightforward response prevented a fiasco. Within three months the stock had recovered.

If company leaders can't get their message across, sometimes the smartest thing to do is ask for help. That's what HNC Software did in April, when it lured Ward Carey away from CS First Boston's Tech Group to repair the company's sagging image on Wall Street. When Carey arrived, HNC's stock was cratering and investors were rapidly losing confidence. Carey talked to analysts and explained the thinking behind HNC's acquisition of Retek, a supplier of management software for retailers, and the buyout of two insurance-software makers. And he did the kind of investor handholding that CEOs often don't have time for. Carey's moves may seem obvious, but they've made a big difference: Not only has the stock doubled from its April lows, but the wild price swings the company experienced earlier in the year seem to have smoothed out. "A lot of small companies just don't get it; they think volatility just comes with the territory," says Carey. "But if you've got the experience with the Street, you can try to fix these things."

Of course, even companies that know how to soothe jittery investors can't massage away real problems. And fast-growing companies face plenty of those. But the wise manager finds a niche to exploit, puts money back into the company, never misses a deadline, sweats the small stuff. And prays.