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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TIM HORTONS INC. $31 (New York symbol THI; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 191.8 million; Market cap: $5.9 billion; WSSF Rating: Extra risk) operates over 2,600 stores in Canada that sell coffee, donuts and a variety of other foods. The company also operates roughly 300 outlets in the United States, mostly near the Canadian border. Franchisees operate about 97% of its outlets. The company was a wholly owned subsidiary of Wendy’s International Inc. until March 2006, when Wendy’s sold 17.25% of its Tim Hortons’ shares to the public at $23.16 each. In September 2006, Wendy’s handed out its remaining 82.75% stake to its own shareholders as a tax-deferred special dividend....
AMERIPRISE FINANCIAL INC. $59 (New York symbol AMP; Conservative Growth Portfolio, Finance sector; Shares outstanding: 242.0 million; Market cap: $14.3 billion; WSSF Rating: Average) provides financial planning services and products to individuals and institutions. In October 2005, former parent American Express Inc. handed out one Ameriprise share for every five Amex shares held. As an independent company, Ameriprise launched a national advertising campaign to establish its brand. This seems to be paying off. In the three months ended September 30, 2006, earnings before unusual items rose 28.8%, to $0.94 a share from $0.73 a year earlier. Revenue rose 5.3%, to $2.0 billion from $1.9 billion....
WELLS FARGO & CO. $37 (New York symbol WFC; Conservative Growth Portfolio, Finance sector; Shares outstanding: 3.4 billion; Market cap: $125.8 billion; WSSF Rating: Above average) is the fifth-largest bank in the U.S. by assets. Unlike the other big banks, Wells Fargo prefers small acquisitions that expand its presence in certain markets. That’s usually a cheaper way to enter new areas than building new branches. Wells Fargo also uses acquisitions to enter niche markets, such as crop insurance. The company still relies on home mortgages and its retail banking operations for the bulk of its profits. In the fourth quarter of 2006, it earned $0.64 a share, up 12.3% from $0.57 a year earlier. Revenue grew 10.6%, to $9.4 billion from $8.5 billion....
WACHOVIA CORP. $56 (New York symbol WB; Conservative Growth Portfolio, Finance sector; Shares outstanding: 2.0 billion; Market cap: $112.0 billion; WSSF rating: Average) is the nation’s fourth-largest bank. Like Bank of America and J.P. Morgan, Wachovia has used acquisitions to grow in the past few years. In 2005, it tried to buy MBNA, but could not reach agreement on a price. However, Wachovia wound up with 150,000 of MBNA’s credit card accounts. That helped it start its own credit card business, and it now has 350,000 credit card accounts. Credit cards account for just 1% of Wachovia’s total loans, so there’s plenty of room to expand this business. Wachovia’s latest acquisition is its $24.2 billion cash and stock purchase of Golden West Financial Corp., one of our long-time WSSF recommendations. Golden West gave Wachovia a much greater presence in California and nine other western states, and increased its assets by roughly 20%....
J.P. MORGAN CHASE & CO. $50 (New York symbol JPM; Income Portfolio, Finance sector; Shares outstanding: 3.5 billion; Market cap: $175.0 billion; WSSF Rating: Above average) is the third-largest bank in the United States. In the past few years, J.P. Morgan has expanded its retail banking operations, which offsets its exposure to its more volatile businesses like stock trading. In 2003, it paid $58 billion in stock for Bank One Corp., which greatly expanded its presence in the Midwest. In October 2006, it swapped its corporate trust business, which provides securities custody and processing services, for Bank of New York’s 338 retail branches in the New York City area. Thanks to these new assets, income from continuing operations in the fourth quarter of 2006 rose 47.3%, to $1.09 a share (total $3.9 billion) from $0.74 a share ($2.6 billion) a year earlier. These figures exclude a $622 million gain on the swap....
BANK OF AMERICA CORP. $53 (New York symbol BAC; Income Portfolio, Finance sector; Shares outstanding: 4.5 billion; Market cap: $238.5 billion; WSSF Rating: Above average) is the second-largest bank in the United States by assets, after Citigroup. The company has used big acquisitions to expand in the past few years. In 2004, it acquired FleetBoston Financial for $47.3 billion in cash and stock. In 2006, it paid $34.6 billion in cash and stock for credit card specialist MBNA Corp. It recently agreed to pay $3.3 billion for U.S. Trust Corporation, which provides asset management to high net worth clients. The company aims to complete this purchase in the first quarter of 2007. Growth by acquisition can be a source of risk. But these purchases increased Bank of America’s presence in markets that it would probably never reach through internal growth....
MOODY’S CORP. $70 (New York symbol MCO) has increased its dividend 14.3%, from $0.07 a share to $0.08. The new annual rate of $0.32 yields 0.5%. The stock fell below $50 in July 2006 on fears that rising interest rates would cut investor interest in new corporate debt securities, and hurt demand for Moody’s ratings. It has recovered as rates stabilized, but it’s expensive at 32 times earnings. Hold. GENERAL MILLS INC. $58 (New York symbol GIS) has raised its dividend for the fourth time in just over two years. The new rate of $1.48 yields 2.6%. The company also plans to buy back more of its stock in 2007. Buy. PHILIPS ELECTRONICS N.V. $37 (New York symbol PHG) hopes to capture a larger share of Asia’s mobile phone market, which could grow by 50% in 2007. It has licensed its brand to a Chinese company that will make low-cost phones under a five-year deal. Buy....
CONAGRA FOODS INC. $27 (New York symbol CAG; Income Portfolio, Consumer sector; WSSF Rating: Above average) makes a wide variety of frozen and packaged foods. Top brands include Chef Boyardee (pasta), Hunt’s (tomato sauce), Orville Redenbacher’s (popcorn) and Van Camp’s (beans). It also supplies ingredients to other food companies. In the past few years, ConAgra has sold its fresh and packaged meat and other non-core operations to focus on its more profitable packaged food businesses. ConAgra is now working to cut its costs with a new restructuring plan, including plant closures and streamlining its other operations. It will also sell more of its low-margin businesses....
DEL MONTE FOODS CO. $11 (New York symbol DLM; Aggressive Growth Portfolio, Consumer sector; WSSF Rating: Extra risk) makes a wide variety of canned fruit and vegetables. In December 2002, Del Monte acquired Heinz’s seafood, baby food, pet food and private label soup businesses. The company felt these operations would broaden its product line, and help it compete with larger food companies. However, some of the new operations did not perform as well as Del Monte hoped. As part of a new restructuring plan, Del Monte sold some of the slow-growth businesses like baby food and soups. It used the cash to expand its pet food operations....
H.J. HEINZ CO. $46 (New York symbol HNZ; Income Portfolio, Consumer sector; WSSF Rating: Above average) is one of the world’s largest producers of condiments and sauces, and accounts for 60% of ketchup sales in the United States. Other products include frozen meals, soups and baby foods. In September 2006, two nominees affiliated with billionaire investor Nelson Peltz became directors of the company after a lengthy proxy fight. Heinz has had six restructurings in the past 10 years, with moderate success. Peltz wants management to be more aggressive in cutting costs and expanding sales. It looks like the pressure is starting to work. In Heinz’s second fiscal quarter ended November 1, 2006, profits from continuing operations rose 20.4%, to $0.59 a share (total $197.4 million) from $0.49 a share ($168.3 million) a year earlier....