3 Emerging Growth Companies to Buy Right Now

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When investing in growth stocks for the long-term, it is often advisable to stick to a few simple rules in order to avoid common mistakes. First, investors should focus on easy-to-understand, straightforward business models. Although there are many great companies that are engaged in arcane or highly complicated businesses, many long-term winners have created tremendous shareholder value by excelling in relatively simple businesses. Examples of this include companies such as McDonald's and Starbucks among many others.

For the average investor, who possesses no special knowledge of an industry, keeping things simple is usually the best bet. In fact, this piece of advice is one of the hallmarks of Warren Buffett's investment style. The Oracle of Omaha has always advised investors to focus on their "circle of competence" and avoid things they don't understand.

Investors should also try to focus on companies that have a significant brand moat, which provides a durable competitive advantage. It takes years to build up a preeminent brand, and it is difficult for competitors to encroach on businesses where consumer loyalty towards a particular brand is strong. Investing in strong brand equities is another facet of Warren Buffett's investment strategy.

The third factor that investors should consider when investing in growth stocks is the company's history of creating shareholder value. While it is not necessary that the stock goes up every year, it certainly makes sense to invest in a business, brand and management team that has created shareholder value over the years rather than destroyed it.

For this reason, investors should focus on stocks that have a strong market track record over long periods of time. Three growth companies that fit these metrics today are Under Armour (NYSE: UA), Whole Foods (NASDAQ: WFM), and Lululemon Athletica (NASDAQ: LULU). Below, we take a look at why these growth stocks are poised for more gains in the coming years.

Under Armour - This company ticks all of the boxes in terms of emerging growth stocks. First, Under Armour operates in a straightforward business that most investors can understand. The company is a leading designer, developer and marketer of advanced athletic apparel. In many ways, the rise of Under Armour is similar to the growth story that has unfolded at larger competitor Nike.

Over the years, the Under Armour brand has become more and more ubiquitous as the company has invested considerably in marketing and securing athlete endorsements. Today, it is common to see the familiar UA logo at athletic events across the country. The brand has been driven by revolutionary product offerings that have resonated with consumers. The company's products are engineered to keep athletes cool, dry, and light and appeals to the casual consumer as well as the serious athlete.

Under Armour continues to be in a rapid growth phase, with revenue and net income climbing for five straight years. Not surprisingly, investors have been rewarded over the long-term by the performance of the business. Over the last five years, shares are up around 170%. Going forward, the attributes that have made this a terrific company and investment should continue to propel the stock price.

Whole Foods - This company has taken a simple, but largely difficult business, and made it very profitable. While other grocery store chains have been struggling with falling margins and stagnant sales, Whole Foods has consistently grown revenue, net income and margins over the last five years. The company has been able to accomplish this by focusing on quality, and in turn, a higher-end consumer. This has allowed Whole Foods to charge a premium for its products, many of which are organic and sold as "better for you."

This successful strategy has created not only a brand which consumers associate with quality and health, but also has allowed Whole Foods to avoid many of the pitfalls inherent to the grocery business. The company's business model is simple and straightforward and the management team also has a history of creating shareholder value.

Over the last five years, shares have risen around 144% and during the last decade the stock has appreciated around 235%. Looking ahead, Whole Foods is attempting to gain traction with a wider demographic and become the grocery store of choice for more Americans. For investors, success in broadening its appeal will likely just be icing on the cake, as Whole Foods has already created a highly profitable and consistent business by catering to higher income, health-conscious consumers.

Lululemon Athletica - This company is a yoga-inspired athletic apparel retailer which shares some similarities to Under Armour. Sales trends, which surged in fiscal 2011 and 2012, show that Lululemon's products are catching on with consumers -- particularly fitness conscious young women who participate in yoga and other sports.

Not only does Lululemon operate in an easy-to-understand business, but it also has created a hip, modern and health-conscious brand which is increasingly resonating with consumers. Margins have benefited from customers' willingness to pay a premium for cool, differentiated products with a positive brand identity. The success of the Lululemon story is reflected in exploding sales, which went from roughly $353 million in fiscal 2009 to over $1 billion in fiscal 2012. For fiscal 2013, analysts have consensus revenue estimates of $1.37 billion for the company.

Both Lululemon and Under Armour have shown Wall Street that there is considerable room for growth within the athletic apparel market, and these two companies are the emerging growth leaders in the space. Investors in Lululemon, like Under Armour, have already reaped large rewards. The company currently has a market cap of around $10 billion and the stock has surged almost 414% over the last five years. Going forward, Lululemon should benefit from increased efficiency at its existing stores, more retail build-out, and an expanding international footprint.

Under Armour, Whole Foods, and Lululemon all possess qualities which make them attractive growth stocks for long-term investors. All three companies operate simple, straightforward businesses and have built emerging brand identities which continue to resonate with a growing number of consumers. Over the last five years, these companies have posted explosive net income and revenue growth and the performance of the stocks reflects management's track record of creating shareholder value.


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