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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Growth Stocks Library Archives
BROADRIDGE FINANCIAL SOLUTIONS INC. $11 (New York symbol BR; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 141.4 million; Market cap: $1.6 billion; WSSF Rating: Extra risk) offers services to the investment industry in three main areas: investor communications; securities processing; and transaction clearing. Due to volatile investment industry conditions, Broadridge has moved down from its peak of $24 in December, 2007 to $10 in October, 2008. As well, both Lehman Brothers and Barclays Bank PLC are Broadridge clients. The recent takeover of Lehman by Barclays could cut demand for its processing services. However, the long-term outlook for Broadridge remains bright. It stands to gain from the increasing complexity of securities regulations and rising levels of share ownership. Broadridge is still a buy.
MACY’S INC. $9.13 (New York symbol M; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 420.6 million; Market cap: $3.8 billion; WSSF Rating: Average) now feels it will earn $1.30 to $1.50 a share in its current fiscal year, down from its earlier prediction of $1.70 to $1.85 a share. Macy’s shares now trade at a low 6.5 times the midpoint of the new range. However, Macy’s strong balance sheet and successful cost controls should help it cope with slowing consumer spending. Long-term debt of $8.8 billion is a reasonable 3.6 times its annual cash flow. It also held cash of $1.3 billion or $3.07 a share at August 2, 2008. Macy’s recently suspended its share buyback plan. That should let it keep paying its $0.53 dividend, which yields 5.8%. Macy’s is a buy.
GENERAL ELECTRIC CO. $19 (New York symbol GE; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 10.0 billion; Market cap; $190.0 billion; WSSF Rating: Above average) earned $0.45 a share in the third quarter of 2008, down 10% from $0.50 a year earlier. That’s mostly due to a 33% drop in profits at GE’s finance division, which accounts for about 45% of its overall earnings. Revenue grew 11.1%, to $47.2 billion from $45.5 billion, thanks mainly to strong demand for power turbines and other energy infrastructure equipment. GE should benefit from the Federal Reserve’s plan to buy back commercial paper from non-banks, including GE’s finance division. The sale of $3 billion of new preferred shares to Warren Buffett plus $12 billion of common stock to the public will also help strengthen GE’s finances, and possibly let it take advantage of acquisition opportunities. GE is a buy.
While the recent downturn has hurt most stocks, it’s been particularly hard on manufacturing companies such as these five. That’s because they serve narrow markets or cyclical industries. However, all of them are doing a good job controlling costs, which will help them stay profitable until the economy improves. That should also let them keep paying above-average dividends. QUAKER CHEMICAL CORP. $17 (New York symbol KWR; Income Portfolio, Manufacturing & Industry sector; Shares outstanding: 10.6 million; Market cap: $180.2 million; WSSF Rating: Average) makes lubricants and specialty chemicals that protect industrial machinery from corrosion. The company recently raised its quarterly dividend for the first time since 2004, from $0.215 a share to $0.23. The new annual rate of $0.92 yields 5.4%....
BANK OF AMERICA CORP. $23 (New York symbol BAC; Conservative Growth Portfolio, Finance sector; Shares outstanding: 5.0 billion; Market cap: $115.0 billion; WSSF Rating: Average) continues to take advantage of the turmoil in the financial services industry to expand its operations. Earlier this year, Bank of America acquired mortgage specialist Countrywide Financial Corp. It has now agreed to buy troubled brokerage firm Merrill Lynch & Co., Inc. (New York symbol MER) for about $31 billion in stock at current prices. The purchase will make Bank of America the world’s largest brokerage firm. Bank of America has sold $10 billion worth of new common shares at $22 each to help pay for Merrill. It has also agreed to sell $25 billion of preferred shares to the U.S. Treasury. As well, the company has cut its quarterly dividend in half, from $0.64 a share to $0.32. The new annual rate of $1.28 yields 5.6%. The lower dividend should save Bank of America $6 billion a year....
The Dow’s recent plunge may be the climax of a panic reaction that assumed the absolute worst for the economy. If governments around the world were doing nothing to counter the credit crisis — or, worse, doing all the wrong things as governments did in the 1930s — then the crisis could get a lot worse. My view is that governments are taking the kind of steps that will contain the crisis and eventually restore liquidity in the banking system. Stock market prices may be near the bottom. However, it’s only possible to spot market reversals in hindsight, so it’s too early to declare a lasting upturn. Even if we have seen the bottom, markets are apt to remain volatile and some stocks are bound to go to lower....
Wells Fargo has avoided most of the big writedowns that have led to the recent bankruptcies of several major banks and brokerage firms. That’s largely to due to its stricter lending standards, which limited its exposure to subprime mortgages. The company’s focus on retail banking also provides it with a sound capital base, plus steady fee income from services such as credit and debit cards and Internet banking. Wells Fargo now aims to acquire struggling Wachovia. It’s a complex transaction, but the deal could lead to big gains for Wells Fargo as it sheds Wachovia’s bad loans and integrates its large retail banking network. WELLS FARGO & CO. $31 (New York symbol WFC; Conservative Growth Portfolio, Finance sector; Shares outstanding: 3.3 billion; Market cap: $102.3 billion; WSSF Rating: Average) provides a wide variety of financial services to nearly eight million customers through roughly 6,000 branches and offices in 23 states. Internationally, it operates in Canada, the Caribbean and Central America. Warren Buffett’s Berkshire Hathaway holding company owns 9% of Wells Fargo’s shares....
FIRSTSERVICE CORP. $14.21 (Toronto symbol FSV; SI Rating: Extra Risk) (416-960-9500; www.firstservice.com; Shares outstanding: 27.9 million; Market cap: $396.5 million) operates in the expanding real estate services market, providing services in the following areas: commercial real estate; residential property management; and property improvement. The company has more than 17,000 employees. FirstService continues to expand profitably through acquisitions and internal growth. Both avenues still offer lots of potential for expansion in the fragmented service sector. Revenues rose 23.5% in the three months ended June 30, 2008, to $457.8 million from $370.5 million a year earlier. (All figures except share price in U.S. dollars.) Excluding one-time items, earnings per share rose 6.3%, to $0.51 from $0.48. Cash flow per share rose 8.2%, to $1.06 from $0.98....
AMERICAN WOODMARK $18.02 (Nasdaq symbol AMWD; SI Rating: Speculative) (540- 665-9100;www.americanwoodmark.com; Shares outstanding: 14.0 million; Market cap: $252.9 million) makes kitchen and bath cabinets in the United States. It offers more than 380 cabinet lines in a wide variety of designs, materials and finishes. It sells its products through a network of dealers and distributors and directly to home centers and major homebuilders. The company operates 15 plants as well as various service centers across the U.S. In the three months ended July 31, 2008, revenues fell 16.2%, to $139.2 million from $166.1 million. Remodeling sales and new construction sales fell. The company made $0.01 a share in the latest quarter, compared to a profit of $0.34 a year earlier. The lower earnings came from inefficiencies in labor and higher overhead and freight costs stemming from lower sales volumes, plus higher energy and material costs....
ADOBE SYSTEMS $25.94 (Nasdaq symbol ADBE; SI Rating: Average) (408-536-6000; www.adobe.com; Shares outstanding: 531.0 million; Market cap: $13.8 billion) reported earnings in the latest quarter that exceeded consensus expectations. Excluding one-time items, earnings per share in the three months ended August 29, 2008 rose 11.1%, to $0.50 from $0.45 a year earlier. That beat expectations of $0.46 a share. Revenues rose 4.2%, to $887.3 million from $851.7 million. In the latest quarter, stronger sales of established products such as Acrobat, Flash and Photoshop software boosted Adobe’s revenues and earnings. However, sales of its Creative Suite 3 software fell 10%, as customers delayed purchases to wait for the launch of the new Creative Suite 4. That upgrade will be available in the fourth quarter of 2008. Adobe holds cash of $2 billion or $3.77 a share. Long-term debt of $350 million is a low 2.5% of its market cap of $13.8 billion. That gives the company plenty of room to finance new product development. The company spends a high 19% of sales on research and development....