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.
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FEDEX CORP. $43 (New York symbol FDX; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 311.4 million; Market cap: $13.4 billion; Price-to-sales ratio: 0.4; WSSF Rating: Average) delivers packages and documents in the United States and over 220 other countries. In its third fiscal quarter, which ended February 28, 2009, FedEx’s earnings fell 75.3%, to $97 million, or $0.31 a share, from $393 million, or $1.26 a share, a year earlier. Revenue fell 13.8%, to $8.1 billion from $9.4 billion. Because of the recession, many of FedEx’s customers are shipping fewer packages. Moreover, many are switching from overnight to longer deliveries to save money. FedEx plans to cut an undisclosed number of jobs, and lower salaries and work hours. These actions will cost it $100 million. But, together with an earlier round of job cuts, they should lower the company’s costs by $1 billion in fiscal 2010....
ARKANSAS BEST CORP. $20 (Nasdaq symbol ABFS; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 25.3 million; Market cap: $506 million; Price-to-sales ratio: 0.3; WSSF Rating: Average) specializes in “less-than-truckload” shipping. This involves loading freight from a number of customers onto a single truck. Arkansas Best carries a wide range of goods, from food and textiles to clothing and furniture. As the economy began to slow in 2008, Arkansas Best decided to maintain its rates. It felt that its strong reputation would help it hang on to its customers. However, freight volumes fell 15% in the fourth quarter, and the company had to lower its rates in order to to stay competitive. In 2008, Arkansas Best’s earnings dropped 48.7%, to $29.2 million, or $1.15 a share, from $56.8 million, or $2.26 a share, a year earlier. Revenue fell 0.2%, to $1.83 billion from $1.84 billion. In response, Arkansas Best is cutting up to 8% of its workforce. It has frozen salaries, shrunk its fleet and closed some distribution facilities....
IDEXX LABORATORIES INC. $36 (Nasdaq symbol IDXX; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 59.1 million; Market cap: $2.1 billion; Price-to-sales ratio: 2.2; WSSF Rating: Average) makes equipment that veterinarians use to detect diseases in animals. Idexx also makes systems that detect contaminants in water and milk. Idexx spends roughly 7% of its revenue on research, which hurts its profits. But this spending gives it plenty of new products to spur sales. Last year, Idexx launched new versions of its two top-selling systems: Catalyst Dx (which analyzes blood and urine), and SNAPshot Dx (which tests for thyroid and liver disorders). Thanks to strong demand for these new products, Idexx’s sales rose 11%, to $1 billion in 2008 from $922.6 million in the previous year. Earnings before several one-time items (mainly the sale of part of its animal drug business) rose 16%, to $118.3 million from $102 million. Earnings per share rose 20.3%, to $1.90 from $1.58 on fewer shares outstanding. Idexx ended 2008 with cash of $78.9 million, or $1.33 a share. Its long-term debt is just $5.1 million....
PETSMART INC. $21 (Nasdaq symbol PETM; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 127.1 million; Market cap: $2.7 billion; Price-to-sales ratio: 0.5; WSSF Rating: Above Average) sells pet food and supplies through 1,112 stores in the U.S. and Canada. PetSmart opened 112 new stores in its latest fiscal year, which ended February 1, 2009. It also opened 45 new in-store PetHotels, which look after pets while their owners are out of town. PetSmart now has 142 PetHotels. As a result of the expansion, sales rose 8.4%, to $5.1 billion from $4.7 billion in the previous year. Same-store sales rose 3.8%. PetSmart’s earnings fell 25.5%, to $192.7 million from $258.7 million. Its earnings per share fell 22.1%, to $1.52 from $1.95 on fewer shares outstanding. However, the prior year included a $95.4-million gain on the sale of an investment. If you disregard this, per-share earnings actually rose 4.1%....
One way to minimize your investment risk is to diversify. For example, you can spread your investments out across the five main economic sectors. This way, you minimize the chances of a big loss in your portfolio from a setback in any one sector. Another way to diversify is to invest a portion of your portfolio in international stocks. There is no one “world stock market”. Instead, there are many stock exchanges around the world, and investing in many of them entails considerable risk. However, one simple strategy to gain international exposure, yet at the same time cut risk, is to invest in U.S. stocks. Many blue-chip U.S. stocks have operations in multiple countries. This will let them benefit from a recovering global economy, as well as a return to prosperity in the U.S....
Technology stocks have always been a more speculative segment of the stock market. The recent downturn has pushed down many of them down lately, but the technology stocks with the greatest long-term potential are those that continue to make significant investments in research and development. The investment odds are against you in a “hot” market — one whose investment appeal is widely, if not universally, recognized. And most tech stocks, even in a market like we’re in now, are still overpriced. This is because many investors have inflated ideas of their value. You can turn the odds in your favour by investing in tech stocks that have hidden assets, or assets that other investors overlook....
CEDAR FAIR L.P. $7.84 (New York symbol FUN; Income Portfolio, Consumer sector; Units outstanding: 55.1 million; Market cap: $432 million; Price-to-sales ratio: 0.4; WSSF Rating: Average) owns amusement parks, water parks and hotels in the U.S. and Canada. Cedar Fair pays quarterly distributions of $0.48 a unit, for a current yield of 24.5%. However, its $1.7- billion debt is a high 3.9 times its market cap. Cedar Fair will probably cut its distributions to free up cash for debt repayments. Even if it does, the lower rate would still yield around 10%. Meanwhile, attendance at Cedar Fair’s parks rose 3% in 2008, to 22.7 million visitors. However, inpark spending per guest fell 1.2%, which is why overall revenues rose just 0.9%, to $996.2 million from $987 million in 2007. Earnings improved to $0.10 a unit from a loss of $0.08. If you disregard a writedown of goodwill and other unusual items, per-unit earnings rose 94.6%, to $1.81 from $0.93....
BUCKEYE PARTNERS L.P. $37 (New York symbol BPL; Income Portfolio, Utilities sector; Units outstanding: 48.4 million; Market cap: $1.8 billion; Price-to-sales ratio: 0.9; WSSF Rating: Average) operates over 8,700 kilometres of pipelines that pump gasoline, jet fuel and other petroleum products. In 2008, Buckeye’s earnings rose 17.9%, to $183.2 million from $155.4 million in 2007, largely as a result of acquisitions, including a natural gas storage facility in northern California. It issued new units to help pay for these purchases. Consequently, earnings per unit grew just 3.3%, to $3.13 from $3.03. Revenue rose 265.2%, to $1.9 billion from $519.3 billion. The slowing economy has hurt fuel demand in the past few months. However, higher pipeline rates have helped Buckeye offset the lower volume. This let Buckeye raise its quarterly distribution by 1.4%. The new annual rate of $3.55 yields 9.6%....
LA-Z-BOY INC. $0.97 (New York symbol LZB; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 51.5 million; Market cap: $50 million; Priceto- sales ratio: 0.05; WSSF Rating: Speculative) makes reclining chairs and other furniture. The sharp decline in housing prices and consumer confidence continues to hurt La-Z-Boy. In its third fiscal quarter, which ended January 24, 2009, its sales fell 22.7%, to $288.6 million from $373.1 million a year earlier. Despite several restructurings over the past few years, including cutting jobs and shifting production to low-cost countries, La-Z-Boy lost $1.25 a share in the latest quarter, compared with a profit of $0.18 a share a year earlier. The company has suspended its quarterly dividend of $0.04 a share to conserve cash, which should save it $8 million a year. La-Z-Boy’s total debt of $90.4 million is equal to a high 1.8 times its market cap. It also holds $18.7 million, or $0.36 a share, in cash....
SHERWIN-WILLIAMS CO. $46 (New York symbol SHW; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 116.9 million; Market cap: $5.4 billion; Price-to-sales ratio: 0.7; WSSF Rating: Above Average) is North America’s largest paint producer. It also operates over 3,300 retail paint stores, which supply 60% of its sales. In 2008, Sherwin’s sales fell 0.3%, to $7.98 billion from $8.01 billion in the prior year. Price increases helped offset lower retail sales volumes. However, sales at its international division grew 7.8% in 2008, partly due to acquisitions of smaller paint producers in Europe and Asia. Overseas markets now account for 20% of Sherwin’s sales. Sherwin’s 2008 earnings dropped 22.5%, to $476.9 million from $615.6 million. The company bought back 6% of its shares in 2008, so earnings per share fell 14.9%, to $4.00 from $4.70. If you exclude writedowns of goodwill, per-share earnings fell 9.8%, to $4.31 from $4.78....