3 Top Growth Stocks for 2015

By Simon EricksonFool.com

Around this time last year, I revealedthree growth stocksthat I expected to outperform the market during 2014:SolarCity,Zillow, andMercadoLibre. Each of these companies indeed had quite a year:

*2014 Total Return includes S&P dividends. Prices are as of 12/31/14.

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The numbers in the chart above jump around quite a bit. December 31 is an arbitrary point in time to assess performance, and growth stocks are no strangers to volatility. Each of these stock prices hit much higher highs and lower lows throughout the year, as well:

Each of the picks still looks well poised to beat the market in the future. And even more important than short-term stock performance is the process that we use to identify these market beaters.

The Process

I'll be gazing into my crystal ball again this year, and divulging three more companies that I expect to outperform during 2015. But once again, I'd first like to focus on the same three reasonsI expect these stocks to outperform:

1)Operational Performance:When you invest, you're buying a stake in a business, so you want to find businesses that are performing very well. Develop a list ofmeaningful operational metricsthat are relevant to the particular industry, and then look for companies that are killing it where it really counts. This means putting less emphasis on the current P/E ratio, and more on metrics that evaluate business performance.

2)Smart and Visionary Management:Growth companies are still...growing. This makes them much more sensitive to managerial decisions -- whether good or bad. Look for leaders who are committed to the long-term success of the company. I like CEOs who are either co-founders, or who have a significant ownership stake -- preferably both.

3)Huge Market Potential:Small companies don't always do so well in price wars. Find industries large enough to support a new player. I look for the company's total annual revenue to be a very small slice of the overall industry.

This Year's List

Without further ado, here are my three top recommendations for 2015.

1)Ubiquiti Networks is wirelessly connecting the world to the Internet. Ubiquiti's engineers work directly with customers to design newer, cheaper, and easier-to-use products. This shortens the development process, and cuts out costs associated with sales and marketing.

Ubiquiti spends only 4% of sales on SG&A, and establishes demand upfront for their newest products. Visionary founder/CEO Robert Pera previously worked as an engineer at Apple, and he owns an incredible 65% of Ubiquiti's shares. And the demand for faster, wireless Internet access is growing quickly.

Consulting firm IDCestimates that fixed wireless connections are growing at nearly 22% per year, and the market for wireless Internet service providers will reach $10 billionby 2017. That demand will require an even larger Internet superhighway, andUbiquiti Networks is adding a few more passing lanes.

2)Stratasys is the best-positioned player in 3D printing. The company has the largest installed base of systems -- now with more than 110,000 additive manufacturing machines globally. This huge installed base feeds the Stratasys "razor and blades" business model -- where customers buy a machine, and then continue to use proprietary consumable materials.

The model is certainly working. Revenue was up an impressive 41% this year, and consumables were up 32%. Stratasys was founded in 1989 by Scott Crump -- one of the pioneers in the 3D printing movement -- and he remains Chairman of the Board today. Industry research group Wohlers Associates expects the market for 3D printing to catch fire, growing from $3 billion in 2013 to $21 billion in 2020. They nearly doubled their estimates from last year, when they predicted $10.8 billion by 2021. That sounds like a market with a lot to build on, and Stratasys is laying out the foundation.

3)Veeva Systems was just named The Motley Fool's Top Stock of 2015, and for good reason.The company is bringing cloud computing to the pharmaceutical industry, allowing drugmakers to develop and market new drugs more efficiently.

Veeva has succeeded in both introducing large pharma customers to their platform and upselling them new products over time. This scalability has worked wonders for operating margins -- which have increased from 11% to 21% during the past three years.

Veeva was founded by Peter Gassner, who was previously the VP atSalesforce.com,and directly responsible for building out the largest and most-used CRM platform in the world. Gassner signed a non-compete with Salesforce for Veeva to focus on the pharma industry, and owns 10% of Veeva shares (insiders collectively own 43%). IDC expects the market for public IT cloud services to grow more than 23% per year,from $47 billion in 2013 to $107 billion in 2017. We think Veeva's stock is a prescription for market-beating returns.

Foolish Bottom Line

Great businesses produce great results. Ubiquiti Networks, Stratasys, and Veeva Systems all have smart management teams that focus on the right metrics to profit from some of the largest opportunities in the business world. I expect them to be successful not only next year, but also for some time into the future.

The article 3 Top Growth Stocks for 2015 originally appeared on Fool.com.

Simon Erickson owns shares of MercadoLibre, SolarCity, Stratasys, Veeva Systems, and Zillow. Simon Erickson has the following options: short January 2016 $85 puts on Stratasys, short January 2015 $50 puts on SolarCity, long January 2016 $50 calls on SolarCity, short January 2016 $50 puts on SolarCity, short January 2016 $27 puts on Veeva Systems, long January 2016 $90 calls on MercadoLibre, short January 2016 $90 puts on MercadoLibre, and short March 2015 $35 puts on Ubiquiti Networks. The Motley Fool recommends MercadoLibre, Salesforce.com, SolarCity, Stratasys, Ubiquiti Networks, Veeva Systems, and Zillow. The Motley Fool owns shares of MercadoLibre, SolarCity, Stratasys, and Zillow. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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