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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WENDY’S INTERNATIONAL, INC. $62 (New York symbol WEN; WSSF Rating: Above average) is the third-largest hamburger chain in the world, behind McDonald’s and Burger King. In 1995, it acquired coffee and donut chain TIM HORTONS INC. $27 (New York symbol THI; WSSF Rating: Extra risk). Tim Hortons is Canada’s largest fast-food chain, with 2,597 outlets. This includes 681 smaller restaurants in non-traditional locations such as gas station convenience stores, universities, hospitals and office buildings. Tim Hortons now has about 23% of the Canadian fast-food market (compared to 18% for McDonald’s). It also has 76% of the coffee and baked goods segment. It plans to expand by at least 1,000 new locations in the next few years....
GAMESTOP CORP. (New York symbols GME $41 and GME.B $37; WSSF Rating: Extra risk) operates over 4,400 stores in the United States and Europe that sell video game players and software. It also publishes a video game magazine. In October 2005, GameStop paid $1.44 billion (70% in cash and 30% in stock) for rival video game retailer Electronics Boutique. That’s a huge investment for the company, which earned $1.17 a share (total $67.7 million) in the fiscal year ended January 31, 2005. Thanks to the takeover, GameStop’s sales in the nine weeks ended December 31, 2005 rose 133% to $1.35 billion. However, if you assume that GameStop acquired Electronics Boutique a year earlier, pro forma same-store sales fell 1.5% due to shortages of Microsoft’s new Xbox 360 video game console....
BARNES & NOBLE INC. $43 (New York symbol BKS; WSSF Rating: Average) is the world’s largest bookseller, with 824 bookstores in 50 states. It also sells books and other products over the Internet. In November 2004, the company handed out its 63% stake in video game retailer GameStop Corp. to its own stockholders as a special dividend. The spin-off hurt Barnes & Noble’s short-term prospects. But it also let it focus on improving profitability at its less-risky book selling business. In the nine weeks ended December 31, 2005, sales at its Barnes & Noble superstores rose 5.2% to $1.1 billion from a year earlier. Same-store sales grew 2.3%. However, sales at its B. Dalton mall-based stores fell 18.4% to $41.3 million as the company continued to close unprofitable outlets. On a same-store basis, sales at this division grew 3.0%. Sales at the online operation rose 1.0%, to $106.1 million....
AMERIPRISE FINANCIAL INC. $45 (New York symbol AMP; WSSF Rating: Average) provides wealth management, brokerage and insurance services through a nationwide network of over 12,000 advisors. It currently owns, manages or administers assets worth $428.1 billion. In the three months ended December 31, 2005, Ameriprise’s income from continuing operations fell 52.2%, to $0.44 a share (total $111 million) from $0.92 a share ($226 million) a year earlier. If you disregard costs related to the separation from American Express and other one-time items, per-share profits fell 6.1%, to $0.77 from $0.82. Revenue crept up to $1.87 billion from $1.84 billion. However, excluding discontinued operations, revenue grew 5%. The company prefers to focus on wealthier individuals to whom it can market a variety of financial products. In the most recent quarter, 44% of the company’s clients paid fees to subscribe to an Ameriprise financial management plan, up from 42% a year earlier. These long-term plans give Ameriprise steadier revenue streams than one-time sales of insurance or other financial products....
AMERICAN EXPRESS CO. $55 (New York symbol AXP; WSSF Rating: Average) is one of the world’s largest financial services providers, with operations in over 130 countries. Its well-known credit card business accounts for roughly 90% of its revenue. The remaining 10% comes from its travel services business. In September 2005, Amex handed out all of its shares in subsidiary American Express Financial Advisors (now called Ameriprise Financial Inc.) to its stockholders as a tax-deferred dividend. As part of the spin-off, it restructured its remaining operations. These moves cut its pre-tax profits in the three months ended December 31, 2005 by $65 million. However, it also received a $60 million gain from a tax settlement. To put these figures in context, Amex earned $0.60 a share (total $751 million) from continuing operations in the fourth quarter of 2005, up 13.2% from $0.53 a share ($669 million) a year earlier. Revenue grew 8.5%, to $6.4 billion from $5.9 billion....
FREESCALE SEMICONDUCTOR INC. (New York symbols FSL $27 and FSL.B $27; WSSF Rating: Extra risk) makes chips for a wide variety of products such as automobiles, computer networking equipment and wireless communication equipment. Motorola accounts for 30% of its total sales. In the past few months, Freescale has done a good job of cutting its costs. That helps explain why its profit in the fourth quarter of 2005 jumped to $0.45 a share (total $192 million) from $0.01 a share ($5 million) a year earlier. The latest quarterly results included an $8 million reversal of a previous writedown, while the 2004 fourth quarter included $84 million in one-time charges related to the spin-off from Motorola. Revenue rose 3.5%, to $1.48 billion from $1.43 billion. Like most technology companies, Freescale spends heavily on research, typically around 20% of its revenue of $13.80 a share....
MOTOROLA INC. $22 (New York symbol MOT; WSSF Rating: Above average) is the world’s second-largest maker of mobile phones, after Nokia Corp. This business supplies about 55% of Motorola’s revenue. The company also supplies infrastructure equipment to wireless phone companies, and makes other communications gear such as two-way radios and high-speed Internet modems. In December 2004, Motorola handed out its remaining 68% stake in chip maker Freescale Semiconductor to its investors, as part of a broader restructuring. In the three months ended December 31, 2005, Motorola earned $0.47 a share from continuing operations, up 67.9% from $0.28 a share a year earlier. If you exclude unusual items, the company would have earned $0.35 a share in the most recent quarter. Revenue rose 18.2%, to $10.4 billion from $8.8 billion....
SONY CORP. $47 (New York symbol SNE; WSSF Rating: Above average) is one of the world’s largest makers of consumer electronic products such as TV sets, DVD players and stereo equipment. This business supplies two-thirds of its revenues. The remaining third comes from its PlayStation video game players, its film and TV studios, and its financial services division. In the past few years, Sony failed to anticipate the strong demand for big screen TV sets that use either plasma or LCD (liquid crystal display) technologies. That let other companies cut into its market share. Meanwhile, its famed Walkman portable music players lost market share, mainly to Apple’s iPod. Now, however, Sony is restructuring its TV business, to focus on new flat screens. This will cost roughly $900 million, but should cut way back on its operating costs, starting with a $50 million saving in fiscal 2007 (fiscal years end March 31)....
LIMITED BRANDS, INC. $23 (New York symbol LTD; WSSF Rating: Average) operates three main retail chains: Limited Brands sells men’s and women’s casual clothing; Victoria’s Secret sells lingerie; and Bath & Body Works sells personal care products such as soaps and fragrances. The company’s move to reposition its Express chain of clothing stores to appeal to younger shoppers seems to be working. In December 2005, same-store sales rose 7% compared with an 18% drop a year earlier. Despite weakness at the Victoria’s Secret and Bath & Body Works chains, overall same-store sales improved by 3%, up from 2%. However, that’s still less than an earlier forecast of 3.4%. Limited Brands is also doing a good job of selling its products though catalogs and the Internet. Its biggest Internet operation is Victoria’s Secret Direct, whose sales in December 2005 rose 17%, compared with a 12% gain a year earlier....
LIZ CLAIBORNE, INC. $34 (New York symbol LIZ; WSSF Rating: Average) designs and markets clothing and accessories for women under roughly 40 labels, including Liz Claiborne, Ellen Tracy and Mexx. It sells these products through major department stores, and over 640 company-owned specialty stores and clearance outlets. It also makes men’s clothing, and licenses its brands to non-apparel manufacturers. Warren Buffett’s Berkshire Hathaway owns 9% of the stock. The company has used acquisitions to spur its growth in the past few years. This has helped it diversify into faster-growing segments of the apparel market, and cut its reliance on products aimed at businesswomen and other professionals. Liz Claiborne is now trying to buy The J. Jill Group, Inc., which sells upscale clothing to women age 35 and older through 175 stores in 34 states. The offer is about 7% more than the $2.84 a share (total $313.6 million) that Liz Claiborne earned in 2004....