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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JONES APPAREL GROUP, INC. $31 (New York symbol JNY; WSSF Rating: Average) designs and markets men’s, women’s and children’s clothing, footwear and accessories. Major brands include Jones New York, Gloria Vanderbilt and Nine West. Jones hires independent manufacturers to produce these products. It sells through big department stores, and through its own chain of roughly 1,050 retail outlets. To cut costs, Jones has consolidated its denim operations in Mexico into one plant, and closed a distribution center in Pennsylvania. It is also streamlining its production cycles and cutting administrative costs. These changes will cost Jones between $70 million and $80 million. But they should cut its annual costs by $100 million within three years. To put these figures in context, Jones probably earned $2.37 a share (total $276 million) in 2005. The stock now trades at 13.1 times that estimate. The $0.48 dividend yields 1.5%....
MOLSON COORS BREWING CO. $63 (New York symbol TAP; WSSF Rating: Average) has agreed to sell 68% of Kaiser, its money-losing brewery in Brazil, for $68 million in cash. The buyer has also agreed to assume $60 million of Kaiser’s debt. To put these figures in perspective, the company earned $112.6 million or $1.44 a share in the nine months ended September 25, 2005. Following the sale, Molson Coors will still own 15% of Kaiser. That will help make it easier for the company to someday launch its Coors Light brand in Brazil. The stock recently fell $6 after the company said that strong competition from low-priced beers and rising energy and other costs will cut Molson Coors profits in the fourth quarter of 2005, and possibly part of 2006....
AVAYA INC. $10 (New York symbol AV; WSSF Rating: Average) makes telecommunications equipment that helps over one million businesses and government agencies manage their phone and data networks. Avaya was a division of Lucent Technologies Inc. until September 30, 2000, when Lucent handed out its Avaya shares to its investors. Selling equipment accounts for about 47% of Avaya’s total revenue. The remaining 53% comes from equipment rentals, plus maintenance and other services. Overseas markets account for 40% of its revenue. The company’s expertise with traditional phone systems puts it in position to profit from the spread of VoIP technology. Many businesses are now upgrading their systems to handle VoIP, since it can greatly cut their long distance bills. Many Avaya customers are likely to stick with it when they migrate to VoIP, instead of trusting their phones to an untested equipment supplier....
THE PROCTER & GAMBLE CO. $58 (New York symbol PG; WSSF Rating: Above average) is one the world’s largest makers of beauty, personal care and household products. It currently has 22 brands that each generate over $1 billion a year in sales. North American accounts for half of its sales. In October 2005, Procter acquired The Gillette Company, which makes a variety of consumer products such as razors, dental products and batteries. These products nicely complement Procter’s brands, and tend to earn higher profit margins. Procter paid $57 billion in stock for Gillette. But an aggressive stock buyback plan means it really financed 40% of the deal with cash....
VERIZON COMMUNICATIONS INC. $31 (New York symbol VZ; WSSF Rating: Average) provides local and long distance phone service to 145 million customers in 29 states. Through 55%-owned Verizon Wireless, it offers wireless service to 49 million customers across the United States. It also provides Internet access to homes and businesses, and publishes telephone directories. In January 2006, Verizon acquired long distance provider MCI, Inc. for $8.5 billion in cash and stock. The company hopes that MCI’s large corporate client base and fiber optic network will help it keep up with its main rivals, who are using acquisitions to expand market share. MCI will add about $15 billion to Verizon’s annual revenues of about $75 billion. However, integration costs may hurt Verizon’s earnings growth in the next two to three years. Verizon probably earned $2.55 a share (total $7 billion) in 2005....
FEDERATED DEPARTMENT STORES, INC. $71 (New York symbol FD; WSSF Rating: Average) operates around 990 department stores in 45 states. In August 2005, Federated paid $11.7 billion in cash and stock for rival May Department Stores Co. Thanks to the merger, Federated’s sales rose 65.7% in its third fiscal quarter ended October 29, 2005, to $5.8 billion from $3.5 billion. On a same-store basis (excluding the May stores), Federated’s third quarter sales grew just 0.6%. Federated had to borrow the cash to buy May. That increased its long-term debt from 0.4 times equity at the end of fiscal 2005 to 0.7 times....
ARKANSAS BEST CORP. $44 (Nasdaq symbol ABFS; WSSF Rating: Average) specializes in long-haul, less-than-truckload (LTL) shipping services, which combine freight from several different customers into a single truckload. LTL accounts for roughly 90% of Arkansas Best’s revenue. Freight carried by the company includes food, textiles, apparel and furniture. Arkansas Best’s fleet services customers in all 50 states, as well as parts of Canada and Mexico. The company also provides full-truckload shipping services, and transports cargo containers over long distances using trucks and railroads. It also provides logistical services, which help its customers better manage their shipping needs....
SNAP-ON INC. $38 (New York symbol SNA; WSSF Rating: Average) makes and distributes tools and storage chests to mechanics, mainly through a fleet of franchised vans that visit automotive garages. This business supplies about half of its revenue. It also makes equipment and software that mechanics use to diagnose automotive problems, as well as a wide range of non-automotive tools. It gets over 40% of its revenue from overseas customers. In 2004, the company restructured its manufacturing and distribution. That helped it improve its profit margins, while speeding up deliveries. Faster delivery improves customer satisfaction, and cuts Snap-On’s inventory costs....
TENNANT COMPANY $52 (New York symbol TNC; WSSF Rating: Average) makes a wide variety of industrial floor cleaning equipment. It also makes outdoor street sweepers. Overseas markets account for a third of its sales. In the third quarter of 2005, Tennant’s earnings jumped to $0.69 a share (total $6.3 million) from $0.11 a share ($1.0 million) a year earlier. However, the year-earlier figure included a $0.20 a share restructuring charge. Sales grew 14.4%, to $137.8 million from $120.5 million. Tennant’s stock fell to $35 in May 2005, but has gained about 50% since as new industrial floor cleaners have expanded its market share. A new line of carpet cleaning products has also spurred sales....
GENUINE PARTS COMPANY $44 (New York symbol GPC; WSSF Rating: Average) distributes over 300,000 automotive replacement parts in the United States, Canada and Mexico, mainly through independent outlets. This business provides about half of its revenue. It also distributes industrial parts, office supplies and electrical equipment. In the three months ended September 30, 2005, earnings rose 12.5%, to $0.63 a share (total $110.9 million) from $0.56 a share ($97.9 million) a year earlier. Sales grew 10.6%, to $2.6 billion from $2.35 billion, mainly due to strong growth at all its divisions, particularly the industrial and automotive parts businesses. Earnings could suffer in the fourth quarter of 2005, as the full impact of Hurricane Katrina and higher gas prices could cut demand for auto parts. Rising costs for steel and other raw materials could also put pressure on Genuine Parts’ profit margins....