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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FAIR ISAAC CORP. $23 (New York symbol FIC; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 48.5 million; Market cap: $1.1 billion; WSSF Rating: Average) makes software that helps banks and businesses calculate the likelihood that a borrower will pay back a loan. Despite new competition, its FICO scoring system is still an industry standard. The subprime mortgage crisis has hurt the banks and other financial institutions that supply roughly half of Fair Isaac’s revenue. These customers may cut back on software spending in the near term. However, over the longer term, the subprime crisis will likely increase demand for Fair Isaac’s reliable credit-scoring software....
BROADRIDGE FINANCIAL SOLUTIONS INC. $20 (New York symbol BR; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 140.3 million; Market cap: $2.8 billion; WSSF Rating: Extra risk) offers services to the investment industry in three main areas: investor communications; securities processing; and transaction clearing. These services help financial services institutions and public companies improve their efficiency and customer service. Despite volatile investment industry conditions, Broadridge continues to expand. It recently paid an undisclosed sum for Investigo Corp., which provides accurate and timely data to wealth management firms. This helps them better manage client portfolios, and comply with various securities regulations. Broadridge’s earnings in the fiscal year ended June 30, 2008 rose 2.4%, to $218.5 million from $213.3 million in the prior year. Earnings per share rose 1.3%, to $1.55 from $1.53, on more shares outstanding. These figures exclude unusual items. Revenue rose 3.3%, to $2.21 billion from $2.14 billion....
LIZ CLAIBORNE INC. $15 (New York symbol LIZ, Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 94.8 million; Market cap: $1.4 billion; WSSF Rating: Average) designs a wide variety of clothing and accessories for men and women. It sells its products mainly through department stores, as well as its own retail stores. The company now plans to sell or discontinue 16 of its roughly 40 brands as part of a major restructuring. Besides lowering costs, this plan will free up more cash to invest in brands with better long-term growth prospects. It also plans to expand its own retail operations, which will cut its reliance on department stores....
JONES APPAREL GROUP INC. $19 (New York symbol JNY; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 83.4 million; Market cap: $1.6 billion; WSSF Rating: Average) designs clothing, accessories and footwear under several brands, including Jones New York, Gloria Vanderbilt and Nine West. The company is starting to see some of the benefits of its restructuring plan, which included phasing out some of its unprofitable clothing lines. This has let Jones cut its annual costs by $100 million. The company is also benefiting from a new deal to supply clothing for teens to Wal-Mart. In the second quarter ended July 5, 2008, earnings before one-time items fell 6.6% to $16.9 million from $18.1 million a year earlier. However, per-share earnings grew 17.6%, to $0.20 from $0.17, on fewer shares outstanding. Sales fell 8.2%, to $829.4 million from $903.9 million. Same-store sales at the company’s retail clothing outlets were flat, but grew 5.8% at its footwear stores....
LIMITED BRANDS INC. $20 (New York symbol LTD; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 340.3 million; Market cap: $6.8 billion; WSSF Rating: Average) operates two main retail chains: Victoria’s Secret (lingerie) and Bath & Body Works (soaps and bath oils). It also operates the La Senza (lingerie) chain, in Canada and 44 other countries. Last year, the company sold 75% of its Express and Limited casual clothing chains, which generated lower profits for it than its other operations. In Limited Brand’s second fiscal quarter ended August 2, 2008, sales fell 11.5%, to $2.3 billion from $2.8 billion, partly due to the Express and Limited transactions in the year-earlier quarter. Same-store sales fell 7%. However, earnings per share before one-time items rose 35.0%, to $0.27 from $0.20 a year earlier. Most of the gain came from a successful cost cutting plan....
MCDONALD’S CORP. $62 (New York symbol MCD; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 1.1 billion; Market cap: $68.2 billion; WSSF Rating: Above average) provides an example: The stock fell over 23%, from around $64 in mid-December 2007 to $49 in January 2008, on fears that high gasoline prices and lower consumer confidence in the wake of the housing market slowdown would limit customer spending. However, we felt the company’s Dollar Menu would continue to attract cost-conscious consumers. Also, McDonald’s operates over 31,000 fast food restaurants in 120 countries. Rising sales in overseas markets would also offset weaker domestic sales, and shield it from a weaker U.S. dollar. As well, new menu items such as premium coffee and healthier foods would continue to spur repeat visits....
H&R BLOCK INC. $25 (New York symbol HRB; Conservative Growth Portfolio, Finance sector; Shares outstanding: 329.2 million; Market cap: $8.2 billion; WSSF Rating: Above average) is best known for its income tax return preparation business. The company provides these services through over 14,500 company- owned and franchised offices in the United States, Canada and Australia. It also sets up temporary offices in major retailers such as Sears and Wal-Mart in the weeks before the April 15 tax deadline. The tax preparation business accounts for about 70% of the company’s total revenue. H&R Block also provides tax, accounting and consulting services to businesses through wholly owned RSM McGladrey Inc., which is the fifth-largest accounting firm in the U.S. Services to businesses account for 20% of H&R Block’s revenue....
TRUE ENERGY TRUST $3.87 (Toronto symbol TUI.UN; SI Rating: Speculative) (403-264-8875; www.tketrust.com; Units outstanding: 79.2 million; Market cap: $306.5 million) produces oil and gas mostly in Alberta and Saskatchewan. About 65% of its production is gas. In the three months ended June 30, 2008, Trilogy’s production fell 30.4%, to 11,922 barrels of oil equivalent per day, from 17,122 barrels. The decline came as the company sold its oil and gas assets in Saskatchewan to focus its operations in Alberta. Cash flow per unit was $0.33, down 29.8% from $0.47. The shares now trade at 2.9 times cash flow. True’s monthly distribution of $0.04 gives it a yield of 12.4%. It flows about 59% of cash flow through to its unitholders. The company used the proceeds of its asset sales to cut its debt to $205.7 million, or 67% of market cap, from 81% at the end of 2007....
TRILOGY ENERGY TRUST $10.75 (Toronto symbol TET.UN; SI Rating: Speculative) (403-290-2900; www.trilogyenergy.com; Shares outstanding: 95.4 million; Market cap: $1.0 billion) holds oil and gas properties in the Kaybob and Grand Prairie areas of central Alberta. Production is weighted 79% toward gas and 21% to oil. In the three months ended June 30, 2008, Trilogy’s cash flow per unit rose 26.8%, to $0.71 from $0.56. Production rose 3.6%, to 21,195 barrels of oil equivalent per day, from 20,467 barrels. Trilogy’s monthly distribution of $0.10 gives it a yield of 11.2%. It flows approximately 34% of its cash flow through to its unitholders. Debt is reasonable at $341.3 million, or 34% of market cap. Trilogy now trades at around 3.8 times its latest cash flow....
ZARGON ENERGY TRUST $21.75 (Toronto symbol ZAR.UN; SI Rating: Speculative) (403-264- 9992; www.zargon.ca; Shares outstanding: 18.2 million; Market cap: $395.6 million) has oil and gas production assets in Alberta, Manitoba, Saskatchewan and North Dakota. Output is weighted 54% toward gas and 46% to oil. In the three months ended June 30, 2008, Zargon’s production rose 9.1%, to 9,239 barrels of oil equivalent per day, from 8,465 barrels. However, cash flow per unit rose 47.6%, to $1.55 from $1.05 a year earlier on sharply higher oil and gas prices. Zargon’s monthly distribution of $0.18 gives the units a yield of 9.9%. The trust flowed just 35% of its cash flow through to its unitholders in the latest quarter. The units now trade at around 3.5 times forecast cash flow based on the latest quarter. Debt of $85.4 million is equal to just under three quarters’ cash flow....