A Pair of Growth Stock Ideas for ’05

The majority of investments found in Peridot-run portfolios could be classified as either contrarian plays or undiscovered value stocks. Nonetheless, sometimes there are growth companies out there that look so attractive that even Peridot will be more than willing to “pay up” for them and watch their businesses grow like wild fires over the course of several years.

While forking over 30 times earnings for stocks is rare for us, in recent weeks we have been accumulating shares of small-cap restaurant chain Buffalo Wild Wings (BWLD) and mid-cap clothing retailer Urban Outfitters (URBN). In both cases, the tremendous growth potential over the next three to five years gives us comfort, even though the high multiples of these names make the stocks very volatile.

From a p/e-to-growth rate (PEG) perspective, you can make the case that 30x 2005 estimates is not too high, given that both companies are slated to grow 25 percent a year, for a PEG ratio only 1.2, compared with 2.0 for the S&P 500. If both BWLD and URBN are able to maintain their growth, which we believe they can, there is no reason both stocks cannot hold above-market multiples for years to come. In fact, both of these stock could triple in the next five years, for a compound annual growth rate of more than 20 percent.

The main reasoning for these growth assumptions is the combination of an extremely popular concept, in addition to a relatively small store base in place at the current point in time. Customers are raving about both Buffalo Wild Wings restaurants and all three concepts that Urban Outfitters is rolling out (Urban Outfitters, Anthropologie, and Free People). BWLD owns and operates 290 units, with ab0ut a third of them in the state of Ohio alone. The company sees the potential for at least 1,000 restaurants in the U.S. URBN still only has 71 Urban stores and 62 Anthropologie stores, or fewer than 1.5 of each per state.

As both of these companies continue to grow, in both popularity and sheer size, both stocks should reflect such growth, making them excellent stories to hold for many years to come.

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