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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CHEVRON CORP. $87 (New York symbol CVX; Conservative Growth Portfolio, Resources sector; Shares outstanding: 2.1 billion; Market cap: $182.7 billion; WSSF Rating: Above average) is the secondlargest integrated oil company in the United States after ExxonMobil. Operations include refineries, pipelines and 25,800 gas stations under the Chevron, Texaco and Caltex banners. In the past few years, Chevron has used acquisitions to offset declining production. It’s also facing rising operating costs as it develops methods to extract oil and gas from deeper levels. But like research costs at a technology company, investments in new reserves should pay off for years to come. Chevron’s expertise has helped it win a new contract with China’s state-owned oil company to jointly develop a major gas field. This deposit is difficult to get at, and its high sulfur content will cost more to process. But this project has huge long-term potential in light of China’s growing energy needs....
AMERICAN EXPRESS CO. $58 (New York symbol AXP; Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.2 billion; Market cap: $69.6 billion; WSSF Rating: Average) is one of the world’s biggest financial services companies, with offices in over 130 countries. Warren Buffett’s Berkshire Hathaway owns about 13% of the company. Best known for its American Express charge and credit cards, the company gets most of its revenue from fees it charges merchants when cardholders purchase goods and services. Its other major business is its 2,200 travel agencies and travelers checks. Despite the wave of new customers in the past few years, most American Express cardholders tend to have above-average incomes and good credit histories. They also spend, on average, over $11,000 a year....
NVIDIA CORP. $44 (Nasdaq symbol NVDA; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 362.9 million; Market cap: $16.0 billion; WSSF Rating: Average) makes graphic chips for computers, video game players and cellphones. These chips make games run smoother, and video images appear more lifelike. Option problems forced Nvidia to cut its reported pre-tax income between 1999 and 2006 by about $150 million. In its first fiscal quarter ended April 29, 2007, Nvidia’s earnings grew 37.5%, to $0.33 a share (total $132.3 million) from $0.24 a share ($92.1 million) a year earlier. Revenue rose 23.8%, to $844.3 million from $681.8 million, thanks to strong demand for its new high-end video chips....
AUTODESK INC. $44 (Nasdaq symbol ADSK; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 231.2 million; Market cap: $10.2 billion; WSSF Rating: Average) makes software that engineers and architects use to design machinery and buildings. The company has completed its review of its stock option plan, which cut its pre-tax earnings by an aggregate of $34.8 million from January 1988 to August 2006. It is now up-to-date with its financial reporting. In its first fiscal quarter ended April 30, 2007, Autodesk earned $0.34 a share (total $83.3 million), up 70.0% from $0.20 a share ($48.5 million) a year earlier. If you disregard unusual items, it would have earned $0.44 a share in the latest quarter. Revenue rose 16.7%, to $508.6 million from $436.0 million....
TIM HORTONS INC. $32 (New York symbol THI; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 189.7 million; Market cap: $6.1 billion; WSSF Rating: Extra risk) operates over 2,700 coffee-and-donut shops in Canada, and 340 in the United States. Franchisees operate 97% of its stores. The company was a wholly owned subsidiary of Wendy’s International Inc. up until April 2006. That’s when it sold shares to the public at $23.162 each. In October, Wendy’s handed out its remaining Tim Hortons stock as a tax-deferred dividend. Investors received 1.3542759 shares for every Wendy’s share held....
YUM! BRANDS INC. $34 (New York symbol YUM; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 520.0 million; Market cap: $17.7 billion; WSSF Rating: Average) operates over 34,000 restaurants in 100 countries. Banners include KFC (chicken), Pizza Hut, Taco Bell (Mexican food), Long John Silver’s (seafood) and A&W (hamburgers). Most of Yum’s recent growth has come from its overseas operations, particularly in China where it owns 2,300 KFC and 370 Pizza Hut outlets. This division now accounts for 20% of Yum’s revenue. Other overseas operations provide 30% of its revenue, while the United States accounts for 50%. Thanks to a 7% rise in same-store sales at its China division, plus a 5% gain at its other international operations, Yum’s sales in the second quarter of 2007 grew 9.1%, to $2.4 billion from $2.2 billion. Same-stores sales in the U.S. were flat due to a food safety scare at some Taco Bell restaurants in the northeast....
MCDONALD’S CORP. $51 (New York symbol MCD; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 1.2 billion; Market cap; $61.2 billion; WSSF Rating: Above average) operates over 31,000 fast-food restaurants in 120 countries. Overseas operations account for two-thirds of its sales, and 40% of profits. The company owns about 25% of its restaurants, but aims to convert them into franchises over the next few years. Consequently, it recently sold 1,600 of its outlets in Latin America and the Caribbean. It received $700 million in cash, but recorded a non-cash $1.6 billion loss on the sale. We think the sale makes sense. Local owners have a better knowledge of local tastes, and can adjust their menus to maximize sales. They will also assume responsibility for capital spending....
MCKESSON CORP. $59 (New York symbol MCK; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 297.0 million; Market cap: $17.5 billion; WSSF Rating: Above average) is the largest wholesale distributor of pharmaceutical drugs in the United States and Canada. It also owns 49% of Mexico’s leading drug distributor. Customers include hospitals and retail pharmacies. It also distributes health and beauty items, and surgical supplies. McKesson’s revenues jumped from $42.3 billion in 2002 (fiscal years end March 31) to $93.0 billion in 2007, or 21.8% compounded annually. Profits before unusual items rose from $1.96 a share (total $572.4 million) in 2002 to $2.19 a share ($646.5 million) in 2003. Profits dipped to $2.18 a share ($653.3 million) in 2004, but rose to $2.89 a share ($885.0 million) in 2007. Part of McKesson’s recent success comes from a change in the way it buys drugs from pharmaceutical companies. Under the old method, it would buy more drugs than it needed, and hope to sell them later at higher prices. Now it charges drugmakers an inventory- handling fee. This better aligns its inventory with its customers’ needs, cuts handling costs and reduces McKesson’s risk....
VERIZON COMMUNICATIONS INC. $41 (New York symbol VZ; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 2.9 billion; Market cap: $118.9 billion; WSSF Rating: Average) provides local and long distance telephone service to over 45 million customers in 28 states. It also provides communication systems to businesses, and owns 55% of Verizon Wireless, which has 60.6 million customers in 50 states. In 2004, the company began a major upgrade of its traditional phone networks. Called FiOS (Fiber- Optic Service), this project aims to eventually replace the copper wires with modern fiber optic lines all the way to its customers’ homes....
AT&T INC. $40 (New York symbol T; Income Portfolio, Utilities sector; Shares outstanding: 6.2 billion; Market cap: $248.0 billion; WSSF Rating: Average) provides telecommunication services to over 65.4 million customers in 22 states. In December 2006, AT&T bought rival phone company BellSouth Corp. for $66.8 billion in stock. That gave it full ownership of AT&T Mobility (formerly Cingular), the largest wireless provider in the United States with more than 62.2 million subscribers. Thanks to the new operations, income doubled in the first quarter of 2007, to $2.8 billion from $1.4 billion a year earlier. Per-share earnings grew just 21.6%, to $0.45 from $0.37, due to the extra shares outstanding. Due to the timing of the merger, its revenue grew 83.5%, to $29.0 billion from $15.8 billion. If the company had completed the merger at the start of 2005, revenue would have risen just 1.7% in 2006....