NEW YORK (MONEY Magazine) - Some of the great growth stocks of the past decade seem poised to continue their winning ways.

But plenty, if not most, of tomorrow's highest returners are too small or too new to show up on a list of the last market cycle's most successful stocks.

That's why we went hunting for small and midcap dynamos with the same qualities that powered the last cycle's best performers: compelling business models, strong (preferably irreproducible) franchises and increasing market share in growing sectors.

We can't guarantee that the four stocks below will grow up to be the next Dell, but they do exhibit the competitive characteristics that we believe will enable them to outperform their peers over the next business cycle. The four are Coach, Intuit, Pharmaceutical Product Development, and Principal Financial Group. Click on any to jump right to the profile.

Over the past two decades, two opposing retailing strategies have been the most successful. On one end of the spectrum there are Wal-Mart and other category killers like Home Depot and Bed Bath & Beyond, which offer a wide selection of products at cut-rate prices. Profit margins may be slim, but with huge sales volumes, growth can be massive.

Midyear Investing Guide       Track the 50 top growth stocks Six classic growth plays Midyear forecast

At the other end are specialty players like Tiffany & Co., LVMH and Gucci. A strong brand mystique affords such names enviably high profit margins, and seasonal cycles ensure that their customers keep coming back. Today's hottest new retailer -- Coach -- is exploiting the latter strategy to tremendous success.

Coach (COH: up $0.48 to $26.22, Research, Estimates) is not a new name, of course. For nearly 60 years it produced high-quality if unremarkable leather handbags and briefcases. But under the corporate ownership of Sara Lee, Coach moldered on the shelf as a woefully underdeveloped asset.

That changed in late 2000, when Coach went public as an independent company. Creative director Reed Krakoff, formerly of Tommy Hilfiger, revamped the product lines, introducing higher-margin materials like fabrics and lighter leathers along with new categories like footwear. "The Coach brand now has real cachet," says Bill McVail of Turner Investment Partners, which owns 44,000 shares.

In fact, Coach has carved out a unique niche -- mid-level luxury. A $200 to $300 Coach bag appeals to consumers who don't see it as a step down from Gucci and Prada purses retailing for $500. But that same Coach bag is equally popular among consumers who are stepping up from Nine West or Kenneth Cole.

Having hit that retailing sweet spot, Coach booked $685 million in sales last year, and growth prospects look strong. The company opened 20 retail stores this fiscal year and plans to open another 40 by 2004, expanding its domestic base to 212.

Additionally, the company is renovating 16 stores and 25 in-department-store boutiques. In Coach's fiscal 2001, remodeled stores posted same-store sales four percentage points higher than unimproved locations.

Coach is also focusing on Japan. Despite the continuing doldrums of the Japanese economy, the Japanese consumer still spends four times as much on accessories annually as the U.S. customer. With just a 2 to 3 percent share of the Japanese accessories market, Coach has an opportunity to muscle a few easy market share points from top players like Louis Vuitton and Prada.

Coach recently opened a flagship store in the Ginza shopping district, the Fifth Avenue of Tokyo, and expects to open another 25 to 30 shops throughout the region in the next three years. Lehman Brothers analyst Bob Drbul thinks that these efforts in Japan will contribute $85 million in revenue this year and $130 million next year.

Along with expansion, the company has also emphasized efficiency. In the past three years, management has updated its manufacturing process, outsourcing virtually all of its production at a much lower cost. As a result, Coach has improved its return on equity from 18 percent to 35 percent in the past two years.

At a recent price around $26, shares in the company trade hands for around 25 times 2002 earnings, which is in line with other luxury retailers like Tiffany & Co. But Susie Hultquist, an analyst at Wanger Asset Management, which owns almost 2 percent of the company, argues that it is not too late to catch Coach on the upswing, which she believes is still just getting going. "At the peak of Tiffany's growth, it was selling for in excess of 50 times earnings," she says. "Coach is still in the early stage of its lifecycle." --back to top

Even in the midst of a boom, Intuit's numbers would be impressive; in the current climate, they're dazzling. Consider: For the past five years the company has increased revenue by an average of 22 percent annually while boosting profits at a 36 percent clip. And Intuit (INTU: up $1.06 to $48.09, Research, Estimates) continues to shrug off the profit warnings throughout the tech sector. In its most recent quarter, revenue expanded by 28 percent and operating income by 72 percent.

Figures like that are a testament to Intuit's power to win and hold market share in the small business and personal-finance software market. The three software products that have roped in the bulk of the $1.3 billion in sales and $172 million in profits Intuit made over the past three quarters -- TurboTax tax preparation software, QuickBooks accounting software for small businesses and Quicken personal-finance software -- have fended off competition from big-name rivals like Microsoft to gain a market share of 70 percent or above.

At the same time that its growing market share is swelling Intuit's top line, the company is squeezing more dollars out of its bottom line by slashing distribution costs and selling more products over the Internet. The result: Operating profit margins have expanded from 13 percent in its 2000 fiscal year to an estimated 22 percent this year.

And talk about a compelling business model: Many of Intuit's products (especially its tax preparation software) provide an almost subscription-like recurring revenue stream, since customers have to buy a new copy every year. Another area of both growth and predictability: online tax filing, where sales of the online version of TurboTax grew by 85 percent this year.

In addition, the company is expanding its traditional small business base to sell an enhanced version of QuickBooks to businesses with 20 to 250 employees -- a potential $17 billion market. While competitors like Microsoft are again challenging Intuit's expansion, CEO Steve Bennett is dipping into a $1.8 billion cash kitty to acquire a portfolio of software holdings that will help it fine-tune its offerings.

Recent purchases give the company the rights to finance and operations software targeted to the construction industry and the not-for-profit sector. Having made a key acquisition in the payroll-outsourcing industry, Intuit is aggressively seeking to expand its market there. Its existing client base of 700,000 small business employers helped add $111 million to Intuit's top line in this fiscal year -- a 32 percent rise from last year.

On the back of its strong growth, Intuit stock has doubled since early 1999, to trade at 34 times estimated earnings for next year. That may not be cheap, but it's not outrageous for a company that can realistically expect to increase earnings by 25 percent annually for the next three to five years. --back to top

The outlook for big pharmas and biotechs is cloudy. Consider the potential pitfalls: patent expiration on key drugs, an increasingly combative Food and Drug Administration and federal politicians who clamor about curbing Medicare spending. Yet those risks could actually be good news for Pharmaceutical Product Development (PPD).

Big pharma and biotechs are increasingly turning to contract research organizations (CROs) like PPD to reduce risks and costs by outsourcing their research and development. CROs provide just about every product and service needed to develop a drug, from finding test patients and conducting experiments to handling the marketing and public relations while the drug is being launched.

Outsourcing is getting to be big business. Last year, an estimated $8.2 billion of health-care R&D was outsourced worldwide. There are at least six major players in the CRO sector, but PPD is "nimbler and more savvy" than the competition, says Herman Saftlas, an analyst at Standard & Poor's.

PPD's strengths range from the cutting edge (it was a pioneer among CROs using genomics technology to start the process of discovering new drugs) to the basic (the company has won an excellent reputation in its sector by consistently delivering on time and on budget).

In an industry where average operating margins are 9.5 percent, PPD's are 17 percent. Since going public in 1996, PPD's growth has been rapid, with revenue rising 21 percent annually over the past five years to $432 million in 2001. That's one reason the stock has shot up 320 percent since 2000, giving the company a market capitalization of $1.3 billion.

CROs come with their share of risks: many R&D contracts are short term, and pharma clients often decide to terminate a contract if testing results are not promising. An apparent spike in the cancellation rate of contracts in the first quarter of 2002 saw PPD's stock drop 20 percent, as investors worried that a bad year for the health-care sector was translating into lower R&D spending.

However, Kent Gasaway, manager of Buffalo Small Cap Fund, which owns nearly a million shares of PPD, thinks that the company's top line will keep growing at its current pace, as the amount of health-care R&D, driven by breakthroughs in genomics, surges in the years ahead. After its recent dip, PPD's (PPDI: up $0.08 to $23.19, Research, Estimates) stock now trades at 17 times 2003's projected earnings. --back to top

Defined contribution plans like 401(k)s have been a great business for financial companies. Problems with Social Security and reductions in the number of pension plans have made such options the best savings choice for retirement.

Employees rank 401(k)s as the second most important benefit behind health care. As such, names like Fidelity and Putnam have reaped millions setting up plans. The growth outlook is promising. A recent study by Cerulli Associates projects 401(k) assets to hit $2.7 trillion in 2006, up from $1.7 trillion in 2000. Plus, recent legislation increased the maximum annual contribution for an individual from $10,500 to $15,000 by 2006.

Unfortunately, it is a highly competitive and largely saturated field -- at least for those duking it out for the largest corporations. Nearly 87 percent of firms with more than 500 employees offer a 401(k). Not so at smaller firms. Just 18 percent of companies with less than 500 employees offer 401(k)s.

That makes Principal Financial Group (PFG), which is the clear leader in this market, an especially attractive prospect.

The demographics for Principal seem particularly favorable. Companies with fewer than 500 employees account for more than 99 percent of U.S. businesses and constitute 50 percent of the work force. At smaller companies, the work force is expected to grow by 13 percent a year, compared with 3 percent at larger companies. Plus, such businesses are especially well positioned to benefit as the economy rebounds. All that bodes well for Principal, which derives 50 percent of its earnings from its domestic asset management business.

Principal has thrived simply by going where the competition isn't. Many plan managers focus their efforts on multinational corporations with billions in assets, which is easier than trying to wrangle thousands of small accounts.

Principal, on the other hand, has built up a nice 401(k) business -- it manages nearly $85 billion in assets -- going after those areas none of the big boys want. Principal's agents all have an employee-benefits background and trek to remote areas of the country where the large asset managers may not even have offices. With a diverse set of products, including life and health insurance, Principal offers one-stop shopping for benefits, making it a more convenient choice for smaller firms.

"Principal has built up a lot of expertise, invested a lot in technology, built a better mousetrap," says Jeff Arricale of T. Rowe Price. "Talk to their competitors, and Principal is the name that keeps coming up."

Patrick Meegan of Hotchkis & Wiley figures that Principal (PFG: down $0.85 to $27.85, Research, Estimates) can show operating earnings growth of 11 to 13 percent per share in each of the next five years. Like most newly demutualized insurance companies, it also has opportunities to improve its operating costs and wring out excess capital. Principal, which went public in November, has plenty of extra capital on its balance sheet, nearly $1 billion, and throws off around $700 million in free cash flow a year.

Existing operations don't require much reinvestment, so Principal can put that money to work elsewhere. "They will redeploy their excess capital primarily through share repurchases, which will increase return on equity because it's taking capital out of the business," says Meegan. He figures the company can add half a percentage point to its return on equity (currently 11 percent) every year for the next three to five years.

At a price around $28, Principal is up 30 percent from its first day of trading. Shares in the company now trade hands for 12 times its estimated 2003 earnings, in line with most life insurance companies. But, says T. Rowe's Arricale, Principal should actually sell on par with other asset managers, closer to 15 times earnings. "Principal has higher growth prospects than other life insurance companies because it serves this niche," says Arricale. "It's a reasonably priced company in a very attractive business." --back to top