(FORTUNE Magazine) – Nothing stokes investor fancy more than the sight of a sleek, turbocharged growth stock. But how do you choose among the thousands of cool little outfits that invent smarter computer software, formulate new drugs, or figure out a better way to sell chickens? Which are the come-ons and which the real comers? Be picky, picky, picky, advises Michael Sorell, emerging growth stock strategist at Morgan Stanley. After all, he says, "you don't have to buy any of these stocks. So you can keep your standards high." Here are some tips that will help you stay in the fast lane and out of the ditch.

Forget trend investing. Emerging growth stocks are less like grapes and more like peaches. Pick them one by one, and avoid the popular bunch of the month. For diversification, figure on putting together a basket of 15 to 20 stocks from different industries. Your broker has reams of information on fast-growth companies. Software like Morningstar's U.S. Equities OnFloppy or Value Line's Value/Screen III allows you to screen thousands of stocks very quickly on your own, so you can sort for the lowest P/Es, the highest growth rates, or some combination thereof. Start by limiting your search to companies with a minimum annual growth rate of 15% to 25%, and begin your winnowing from there.

Mature industries contain some of the best growth stocks. That's right. Just look at Columbia/HCA Healthcare, the hospital chain based in Nashville, or Dallas garbage hauler USA Waste Services. Even businesses in mature markets can grow like adolescents, as these companies are expected to do (see table). Both are expanding at a torrid pace by snapping up smaller players in their fragmented markets and imposing operating efficiencies.

New stars should have genuine competitive advantages. The edge can be a technological advance, a tastier hamburger, or a better retail location, but competitors must not be able to duplicate it easily, advises Jim Oberweis, manager of the Oberweis Emerging Growth fund. Extremely profitable businesses attract competition the way honey does bears--big bears. Without patent protection, superior management strategies, or strong franchises, smaller companies are likely to be mauled by larger outfits that come shambling through the woods, stomping on profit margins and stealing market share.

One company that has been turning out better mousetraps is EMC in Hopkinton, Massachusetts. Over the past five years, EMC's mainframe computer storage device has become a market leader by being faster and cheaper than competing products. Now EMC is taking aim at the burgeoning client/server market with its new Centriplex storage device. James Porter, president of Disk/Trend, a Silicon Valley market research firm, says this latest product "looks like another hit" for EMC.

Stick with businesses generating high pretax profit margins and sales growing in tandem with earnings. Companies can keep profit margins fat by squeezing costs when revenues slow. But to sustain earnings growth, they must boost sales. Some businesses are intrinsically more profitable than others, of course, but a well-diversified portfolio of emerging growth stocks should have an average pretax profit margin of around 20%, according to Dennis Sherva, a managing director at Morgan Stanley's Asset Management. (If you look that number up in Value Line or Moody's, it's called the operating margin.)

Eliminate companies that do not maintain returns on equity of at least 15%. Also be wary of fluctuations in this extremely important measure. If sales and earnings are climbing 30% a year, the return on equity will be 30%, assuming the company pays no dividends and has no debt. But fast-growing businesses often fund expansion by issuing more stock. If earnings are growing while the ROE is sliding, that's evidence that a company's new business is less profitable than its old. Perhaps management is expanding too fast, or the market is getting saturated. And watch it if an ROE is increasing faster than the rate of earnings growth. This could mean that the company is borrowing money to finance itself. That's not necessarily bad, but debt can be especially hazardous to the health of a rapidly growing company. Focus on businesses that depend on little or none of the hard stuff.

Deckers Outdoor answers all those requirements, says Smith Barney analyst Faye Landes. The company, out of Carpinteria, California, manufactures Teva sports sandals, which have a patented nylon/Velcro strapping system that provides added support for the foot, and are the sandals of choice for outdoor types. Earnings have been growing at a compound rate of over 60% a year, operating profit margins are running around 30%, and Deckers has no long-term debt.

A high proportion of recurrent revenues helps fast-growing companies stay on track. A company that makes engagement rings, a once-in-a-lifetime purchase, will have a harder time growing than a company that makes razor blades. It's that simple. Leasing Solutions, a small info-tech vendor lessor in San Jose, isn't in the razor blade business, but it might as well be. Vendor lessors market their financial services to the makers of equipment rather than to end users, and then team up with the manufacturer to finance purchases by the customer. Since leases typically run for three years, a high proportion of the company's revenues are locked in at the beginning of every year. An underappreciated twist to the leasing business, observes Timothy Summers, analyst for Principal Financial Securities, is that the contract actually gets more profitable as time goes on because of the way the lessor amortizes its interest expense. Leases work like mortgages, so interest expense declines over time.

Be miserly. Even the best of emerging growth companies will be a bad investment if you pay too much for the stock. As a general rule, investors should shy away from any growth stock when the P/E multiple, based on current earnings, outstrips the company's estimated growth rate. And raise your eyebrows right along with those rosy forecasts. Fantastic earnings projections often turn out to be exactly that, fantasy. In such instances, the higher the P/E, the harder it falls. To avoid those air pockets, Foster Friess, manager of the Brandywine funds, likes to stick to emerging growth stocks with P/Es under 20, no matter what the projected growth rate may be.

One exceptionally cheap fast-grower in Friess's portfolio right now is AGCO, a farm-equipment manufacturer based in Duluth, Georgia. AGCO was put together over the past five years from acquisitions--among them, Deutz-Allis and Massey Ferguson. Usually farm-equipment makers offer dealers contracts that force them to sell only their single line of equipment, say, combines or manure spreaders. Because of AGCO's string of acquisitions, its dealers can offer ten major brands of farm equipment, including a wide array of tractors, balers, planters, and harvesters. Says Friess: "The cross-selling really works."

Know when to sell. Fast-growing stocks tend to be volatile, so you always run the risk of giving back a large part of your gains if the stock takes a sudden dive. Friess imposes a disciplined selling strategy on himself, which he refers to as "pigs at a trough." He maintains a portfolio of around 50 stocks, but he is always on the lookout for something new. When he finds a stock that is more promising than one of his holdings, he sells the old one and buys the newcomer. The stock he sells need not be headed for a fall, says Friess. The new pig just has to be hungry enough to push away an established rival, whose growth appetite is not as sharp.

Always be aware that the odds are against you. A recent long-term study led by Josef Lakonishok of the University of Illinois shows that high-growth stocks as a group perform more poorly than stocks with more modest growth rates (see chart). Equities with the lowest growth rate in sales returned an annual average 20% from 1968 through 1989, vs. just 13% for the fast-growers.

The lesson here is that investors should look far beyond simple sales-growth rates when hunting for good buys. And in that, small investors have a real edge over the institutions. There are over 23,000 publicly traded small companies in the U.S. But only a few thousand of them are widely followed by Wall Street. That means the emerging growth universe is largely undiscovered country. Out there are thousands of companies that no one is paying attention to. The odds are good that one or two of them just may turn out to be the quintessential fast-growing company--a hotcake maker, perhaps?--of your dreams.