8 Stocks Poised for Rapid Growth

NO ECONOMY IN THE world is growing as fast as that of Second Life, a virtual world now regularly trod by a million user-controlled characters. They buy digital land, pay for entrance to computer-drawn night clubs and hire the simulated services of tattooists, gunsmiths and prostitutes, all in exchange for quite real money. Gross domestic product, if you will, totaled $338 million (in local currency, roughly 89 billion Linden dollars) during the second quarter. That's a 14% jump from the first quarter.

Simulation of a less recreational sort is booming, too. Just over two years ago in this space I recommended shares of Southpointe, Pa.-based Ansys (ANSS), a maker of design software. Sales have since increased 20%, to $111.2 million in the second quarter. The portion of each dollar cleared as operating profit has swelled a nickel to 48.4 cents. Earnings per share are running 40% higher and have topped Wall Street's forecasts by double-digit percentages in each of the past four quarters, sending analysts scrambling to sweeten their forecasts. Ansys stock has gained 66% since my endorsement. The broad American stock market has fallen 16% during the same stretch.

Ansys makes dozens of programs, each of which allows manufacturers to subject virtual products to mock physics. One program anticipates the effects of a car crash. Another predicts how a proposed bridge will fare in high wind. Builders of big-ticket goods like cars and bridges have long relied on simulation software, but makers of consumer goods and medical devices are now going virtual, too. Physics software is handy for improving the drug delivery of asthma inhalers. It can predict which shape of artificial hip socket will cup a femur head just so. It can drop make-believe cellphones, heat virtual laptops to crotch-scorching levels and find the point at which a flat-screen television becomes a flimsy-screen one. All of this makes products safer, cheaper, smaller and stronger, while trimming development budgets.

Pricey energy and powerful computers are also spurring demand for simulation software. Builders of power plants, oil wells and engineers are newly focused on improving efficiency. Fluid dynamics programs can help, and computer chips have reached speeds that make such programs easier to fire up and use. Also, the programs themselves have become easier to master. Companies that used to hire simulation specialists are now installing simulation software on their own engineers' machines.

All this recently helped Ansys earn a spot on a screen for companies with fast sales and earnings growth, backed by forecasts for more of the same. (Have a look at all eight screen survivors if you like, or run the search yourself using SmartMoney's stock screener and the full list of criteria.) I remain impressed by the company's growth prospects, but am starting to wonder if 27 times the 2008 earnings forecast is not a touch too much to pay. Earnings are seen increasing by a third this year but only half as fast next year. Stocks with depressed price/earnings ratios are suddenly abundant, and so perhaps a bit more choosiness is in order than at the time of my last look at Ansys. It goes for $45 a share now. I'd hold out for something below $40.

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