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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THE DUN & BRADSTREET CORP. $68 (New York symbol DNB; Conservative Growth Portfolio, Finance sector; WSSF Rating: Average) provides credit reports and other information on over 100 million companies in 200 countries. These reports help lenders and purchasers make better business decisions, which cuts their risk. Dun & Bradstreet’s earnings have grown at 17% compounded yearly over the past five years, compared to 26.5% for Moody’s. Consequently, its stock trades at a lower p/e— 17.4 times its 2006 profit estimate of $3.90 a share. However, we feel Dun & Bradstreet has great long-term growth potential as world trade grows....
MOODY’S CORP. $53 (New York symbol MCO; Conservative Growth Portfolio, Finance sector; WSSF Rating: Average) provides credit ratings on bonds and other securities issued by roughly 200,000 commercial and government entities in over 100 countries. The company has about 40% of the global credit rating market. It also sells credit risk management software to financial institutions. Moody’s stock has dropped roughly 25% in the past three months. Investors fear that rising interest rates will cut interest in new debt securities, particularly those related to the home mortgage industry. It now trades at 26.0 times its forecasted 2006 earnings of $2.08 a share. The $0.28 dividend yields 0.5%. The company is currently one of five companies designated by the SEC to provide credit ratings on new securities. Issuers can speed up the registration process if they have a credit rating above a certain level....
MCGRAW-HILL COMPANIES INC. $49 (New York symbol MHP; Conservative Growth Portfolio, Consumer sector; WSSF Rating: Average) is a leading publisher of school textbooks. It also publishes BusinessWeek magazine and several trade journals, and owns four TV stations. However, it gets roughly two-thirds of its profits from its Standard & Poor’s subsidiary, which provides credit ratings and opinions on a variety of investments. Institutional investors rely on these ratings to select investments. The stock rose from $44 in July 2005 to $60 in March 2006, but has moved down recently on fears that weakness in global stock markets will hurt Standard & Poor’s revenue growth. Fears of lower advertising revenue at its magazine and TV business have also weighed on the stock....
DOW JONES & CO. $34 (New York symbol DJ; Conservative Growth Portfolio, Consumer sector; WSSF Rating: Above average) publishes The Wall Street Journal and Barron’s magazine. It also owns several smaller publications, and provides newswire and specialized information services. The company has suffered in this decade, like all publishers, from fiercer competition for ads. Its profits have stagnated in the past five years, although sales have risen from $1.56 billion in 2002 to a likely level of $1.9 billion or so this year. The stock now trades at 30.9 times its forecast 2006 profit of $1.10 a share. The $1.00 dividend yields 2.9%. Dow Jones is doing a good job of controlling its costs, which gives it more cash to expand faster- growing businesses such as Internet sites. Its latest restructuring plan should save it $15 million a year, mainly by streamlining management and outsourcing more administrative functions....
YUM! BRANDS INC. $49 (New York symbol YUM; Aggressive Growth Portfolio, Consumer sector; WSSF Rating: Average) operates around 32,000 fast food restaurants in over 100 countries. That’s more outlets than McDonald’s (see box on page 62), although McDonald’s generates higher annual sales. The company owns about 25% of these restaurants, and franchisees own the rest. It aims to sell more of its U.S. outlets to franchisees in the next few years, which would cut its overall risk. Yum prefers to own stores in developing countries, however, at least until local managers learn the business. Yum gets most of its sales and profits from three main banners: KFC (chicken); Pizza Hut; and Taco Bell (Mexican food). It also operates the smaller A&W (hamburgers) and Long John Silver’s (seafood) chains....
WEYERHAEUSER CO. $63 (New York symbol WY; Conservative Growth Portfolio, Resources sector; WSSF Rating: Average) is a leading forest products company. It owns or leases 36 million acres of timberland in the United States, and Canada. We normally advise investors to avoid forest product stocks, due to high labor costs, excessive environmental regulations and international trade disputes. However, we feel Weyerhaeuser is different. Its large land holdings are worth around $41 a Weyerhaeuser share, and its U.S. and Canadian operations will benefit from a new deal between the two countries to settle a dispute over tariffs on Canadian lumber exports to the U.S. In fact, the company’s Canadian unit will probably get back $300 million of the $377 million in extra duties that it paid in the past five years....
APACHE CORP. $62 (New York symbol APA; Aggressive Growth Portfolio, Resources sector; WSSF Rating: Average) explores for and produces oil and natural gas in North America, the UK, Australia, Argentina, China and Egypt. In 2005, oil accounted for 54% of its production, while gas supplied 46%. In the past few years, Apache has expanded its operations in the Gulf of Mexico. It currently operates over 400 offshore platforms, which accounted for 18% of its 2005 production. Oil companies have operated in the Gulf of Mexico for 60 years. But many of the bigger firms are now looking elsewhere for new reserves, because the yearly threat of hurricane damage increases the risk of drilling in the Gulf. That’s why BP recently sold its remaining operations in the Gulf to Apache for $1.3 billion....
ENCANA CORP. $47 (New York symbol ECA; Conservative Growth Portfolio, Resources sector; WSSF Rating: Average) is a leading Canadian energy company. Natural gas accounts for about 75% of its production. In the past two years, EnCana has sold most of its overseas assets and conventional properties to focus on early-stage natural gas fields in North America. These properties are located mainly in remote mountainous areas, which makes them more expensive to develop....
UNITED TECHNOLOGIES LTD. $62 (New York symbol UTX; Conservative Growth Portfolio, Manufacturing & Industry sector; WSSF Rating: Above average) operates in two main fields. Its aerospace businesses include Pratt & Whitney (aircraft engines), Sikorsky (helicopters) and Hamilton Sundstrand (aircraft electronics). These operations supply about 40% of the company’s revenue, and 45% of its profit. It also supplies building equipment and services, which include Carrier (heating and air conditioning), Otis (elevators) and UTC Fire & Security (which provides sprinkler systems, intruder alarms and security services under the Chubb and Kidde banners)....
TOYOTA MOTOR CORP. ADRs $116 (New York symbol TM; WSSF Rating: Above average) is Japan’s largest automobile maker, and the world’s second-largest after General Motors. Sales outside of Japan account for 60% of the total. Toyota also makes industrial equipment such as forklifts, and pre-fabricated housing. Like most automakers, it offers vehicle loans through its financing division. Each Toyota ADR represents two of Toyota’s common shares. Japan imposes a 15% withholding tax on dividends paid to U.S. stockholders. Toyota’s sales grew from $106.4 billion in 2001 (fiscal years end March 31) to $172.7 billion in 2005. Profits slipped from $2.92 per ADR (total $5.4 billion) in 2001 to $2.28 per ADR ($4.2 billion) in 2002, but jumped to $6.66 per ADR ($10.9 billion) in 2005....