Growth Stocks
Although growth stock picks can be highly volatile, they can make good long-term investments. They may be well-known stars or quiet gems, but they do share one common attribute—they are growing at a higher-than-average rate within their industry, or within the market as a whole, and could keep growing for years or decades.
And keep in mind that we focus on growth stocks, which have a good long-term history and favourable prospects. We downplay momentum stocks that tend to attract many investors simply because they are moving faster than the market averages, but are liable to fall sharply when their momentum fades.
There’s room for growth stock investing in your portfolio, but make sure you follow our TSI Network three-part Successful Investor strategy for your overall portfolio:
- Invest mainly in well-established companies;
- Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
- Downplay or avoid stocks in the broker/media limelight.
Make better stock picks when you read this FREE Special Report, Canadian Growth Stocks: WestJet Stock, RioCan Stock and More.
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Most investors recognize that aggressive investments have the potential to produce higher returns than the more conservative choices in your portfolio. But they can also suffer bigger losses. As well, aggressive stocks are often more highly leveraged and volatile than conservative stocks. Understanding all this, there are still very good reasons to turn to aggressive stocks. And there are ways to earn big returns without exposing yourself to excessive risk. Here are 4 principles that we use to select our growth stock picks for Stock Pickers Digest, our newsletter for the aggressive portion of investors’ portfolios.
- Limit aggressive holdings to 30% of your overall portfolio. Because aggressive stocks expose you to a greater risk of loss, we recommend limiting your aggressive holdings to no more than about 30% of your overall portfolio....
MCGRAW-HILL COMPANIES INC. $42 (New York symbol MHP; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 293.4 million; Market cap: $12.3 billion; Price-to-sales ratio: 2.0; Dividend yield: 2.4%; TSINetwork Rating: Average; www.mcgraw-hill.com) announced in September 2011 that it will split into two separate, publicly traded companies. One of these new firms, McGraw-Hill Markets, will sell a variety of financial-information products. This business will include Standard & Poor’s, which provides credit ratings on bonds, and McGraw-Hill’s J.D. Power market-research firm. McGraw-Hill Markets will have annual revenue of $4 billion. International sales will account for 40% of that total. The other company, McGraw-Hill Education, will publish textbooks for schools and colleges. This business will have $2.4 billion of annual revenue....
3M COMPANY $88 (New York symbol MMM; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 694.5 million; Market cap: $61.1 billion; Price-to-sales ratio: 2.1; Dividend yield: 2.7%; TSINetwork Rating: Above Average; www.3m.com) makes over 55,000 different products. It was formerly known as Minnesota Mining & Manufacturing.
The company owns a range of well-known brands, including Post-it notes, Scotch tape, Scotch-Brite household cleaning products, Scotchguard protection and Thinsulate insulation.
3M has six main business segments: industrial and transportation (roughly 33% of sales and 31% of earnings), health care (17%, 22%), consumer and office (14%, 12%), safety, security and protection (13%, 12%), display and graphics (12%, 12%), and electronics and communications (11%, 11%).
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The company owns a range of well-known brands, including Post-it notes, Scotch tape, Scotch-Brite household cleaning products, Scotchguard protection and Thinsulate insulation.
3M has six main business segments: industrial and transportation (roughly 33% of sales and 31% of earnings), health care (17%, 22%), consumer and office (14%, 12%), safety, security and protection (13%, 12%), display and graphics (12%, 12%), and electronics and communications (11%, 11%).
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DIAGEO PLC ADRs $94 (New York symbol DEO; Conservative Growth Portfolio, Consumer sector; ADRs outstanding: 625.6 million; Market cap: $58.8 billion; Price-to-sales ratio: 3.6; Dividend yield: 2.8%; TSINetwork Rating: Above Average; www.diageo.com) continues see strong demand for its top brands, such as Smirnoff vodka, Johnnie Walker scotch whisky and Captain Morgan rum, in fast-growing markets like Latin America and Africa. The company now gets 40% of its sales from emerging markets.
In the six months ended December 31, 2011 (Diageo’s fiscal year ends June 30), the company’s revenue rose 8.2%, to 5.8 billion pounds from 5.3 billion pounds a year earlier (1 British pound = $1.57 Canadian). Due to an unusual tax charge, earnings per ADR fell 20.3%, to 1.53 pounds from 1.92 pounds a year earlier (each American Depositary Receipt represents four Diageo common shares). Without this charge, earnings would have risen 16.0%.
Diageo is a buy.
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In the six months ended December 31, 2011 (Diageo’s fiscal year ends June 30), the company’s revenue rose 8.2%, to 5.8 billion pounds from 5.3 billion pounds a year earlier (1 British pound = $1.57 Canadian). Due to an unusual tax charge, earnings per ADR fell 20.3%, to 1.53 pounds from 1.92 pounds a year earlier (each American Depositary Receipt represents four Diageo common shares). Without this charge, earnings would have risen 16.0%.
Diageo is a buy.
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GENERAL MILLS INC. $39 (New York symbol GIS, Conservative Growth Portfolio, Consumer sector; Shares outstanding: 644.7 million; Market cap: $25.1 billion; Price-to-sales ratio: 1.6; Dividend yield: 3.2%; TSINetwork Rating: Above Average; www.generalmills.com) reports that sales of its cereals, soups and baking products are falling in the U.S. That’s making it hard for the company to pass along rising ingredient costs. Increasing competition is also forcing it to spend more on advertising.
As a result, General Mills now feels that it will earn $2.54 a share in its 2012 fiscal year, which ends May 31, 2012. That’s down from its earlier forecast of $2.60 a share. Even so, the stock trades at a reasonable at 15.4 times the new estimate. Moreover, the company continues to expand internationally, which cuts its risk.
General Mills is a buy.
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As a result, General Mills now feels that it will earn $2.54 a share in its 2012 fiscal year, which ends May 31, 2012. That’s down from its earlier forecast of $2.60 a share. Even so, the stock trades at a reasonable at 15.4 times the new estimate. Moreover, the company continues to expand internationally, which cuts its risk.
General Mills is a buy.
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IDEXX LABORATORIES INC. $89 (Nasdaq symbol IDXX; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 55.1 million; Market cap: $4.9 billion; Price-to-sales ratio: 4.0; No dividends paid; TSINetwork Rating: Average; www.idexx.com) earned $2.78 a share in 2011, up 17.3% from $2.37 in 2010. Revenue rose 10.4%, to $1.2 billion from $1.1 billion.
Sales of the company’s Pro-Cyte Dx hematology analyzer, which processes animal blood tests in just two minutes, continue to rise. This device cuts veterinarians’ reliance on external labs and lowers their costs. Demand is also increasing in overseas markets. For example, Idexx recently received approval to market this device in Japan.
Idexx feels that its revenue will rise by 7% to 8% in 2012. However, the stock trades at 29.0 times the company’s likely 2012 earnings of $3.07 a share. That high p/e ratio makes the stock vulnerable to a sudden drop if Idexx fails to meet its revenue or earnings growth targets.
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Sales of the company’s Pro-Cyte Dx hematology analyzer, which processes animal blood tests in just two minutes, continue to rise. This device cuts veterinarians’ reliance on external labs and lowers their costs. Demand is also increasing in overseas markets. For example, Idexx recently received approval to market this device in Japan.
Idexx feels that its revenue will rise by 7% to 8% in 2012. However, the stock trades at 29.0 times the company’s likely 2012 earnings of $3.07 a share. That high p/e ratio makes the stock vulnerable to a sudden drop if Idexx fails to meet its revenue or earnings growth targets.
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BRIGGS & STRATTON CORP. $18 (New York symbol BGG; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 49.8 million; Market cap: $896.4 million; Price-to-sales ratio: 0.4; Dividend yield: 2.4%; TSINetwork Rating: Above Average; www.briggsandstratton.com) is closing plants in Tennessee and the Czech Republic due to declining sales of lawn mowers and snow blowers. It will shift some the production from these plants to other facilities in the U.S. The company expects to complete these closures by May 2012.
These moves will cost Briggs between $50 million and $55 million. To put that in context, it earned $63.2 million, or $0.48 a share, in the fiscal year ended June 30, 2011. However, the closures should cut Briggs’ yearly costs by $18 million to $20 million.
Briggs & Stratton is a hold.
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These moves will cost Briggs between $50 million and $55 million. To put that in context, it earned $63.2 million, or $0.48 a share, in the fiscal year ended June 30, 2011. However, the closures should cut Briggs’ yearly costs by $18 million to $20 million.
Briggs & Stratton is a hold.
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FRONTIER COMMUNICATIONS CORP. $4.59 (Nasdaq symbol FTR; Income Portfolio, Utilities sector; Shares outstanding: 995.1 million; Market cap: $4.6 billion; Price-to-sales ratio: 0.9; Dividend yield: 8.7%; TSINetwork Rating: Average; www.frontier.com) sells telephone, high-speed Internet and video services to 5.3 million customers in 27 states.
The company has cut its quarterly dividend by 46.7%, to $0.10 a share from $0.1875. The new annual rate of $0.40 yields 8.7%. The cut should free up cash that Frontier can use to lower its $8.2-billion long-term debt, which is a high 1.8 times its market cap. It also needs to keep investing in its network upgrades.
Frontier is still a hold.
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The company has cut its quarterly dividend by 46.7%, to $0.10 a share from $0.1875. The new annual rate of $0.40 yields 8.7%. The cut should free up cash that Frontier can use to lower its $8.2-billion long-term debt, which is a high 1.8 times its market cap. It also needs to keep investing in its network upgrades.
Frontier is still a hold.
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VERIZON COMMUNICATIONS INC. $38 (New York symbol VZ, Conservative Growth Portfolio, Utilities sector; Shares outstanding: 2.8 billion; Market cap: $106.4 billion; Price-to-sales ratio: 1.0; Dividend yield: 5.3%; TSINetwork Rating: Average; www.verizon.com) is the largest provider of wireless
services in the U.S., with 108.7 million subscribers. Wireless accounts for 63% of its revenue. It also has 24.1 million phone and Internet customers.
In 2011, Verizon added 6.3 million new wireless subscribers (net of deactivations) and 278,000 new high-speed Internet customers. These gains offset the loss of 1.9 million phone customers.
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services in the U.S., with 108.7 million subscribers. Wireless accounts for 63% of its revenue. It also has 24.1 million phone and Internet customers.
In 2011, Verizon added 6.3 million new wireless subscribers (net of deactivations) and 278,000 new high-speed Internet customers. These gains offset the loss of 1.9 million phone customers.
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AT&T INC. $30 (New York symbol T; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 5.9 billion; Market cap: $177.0 billion; Price-to-sales ratio: 1.4; Dividend yield: 5.9%; TSINetwork Rating: Average; www.att.com) gets 50% of its revenue from its 103.2 million wireless customers. The other 50% mainly comes from its 39.0 million telephone clients and 16.4 million high-speed Internet users.
The company recently cancelled its plan to buy rival wireless carrier T-Mobile from Germany’s Deutsche Telekom AG; AT&T felt that competition regulators would have blocked the deal.
As a result, AT&T will pay Deutsche Telekom a $4-billion breakup fee, consisting of $3 billion in cash and $1 billion of wireless spectrum. That’s partly why AT&T’s earnings fell 80.1% in 2011, to $3.9 billion, or $0.66 a share. In 2010, it earned $19.9 billion, or $3.35 a share. Without unusual items, earnings per share would have fallen 3.9%, to $2.20 from $2.29.
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The company recently cancelled its plan to buy rival wireless carrier T-Mobile from Germany’s Deutsche Telekom AG; AT&T felt that competition regulators would have blocked the deal.
As a result, AT&T will pay Deutsche Telekom a $4-billion breakup fee, consisting of $3 billion in cash and $1 billion of wireless spectrum. That’s partly why AT&T’s earnings fell 80.1% in 2011, to $3.9 billion, or $0.66 a share. In 2010, it earned $19.9 billion, or $3.35 a share. Without unusual items, earnings per share would have fallen 3.9%, to $2.20 from $2.29.
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