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.
Make better stock picks when you read this FREE Special Report, Canadian Growth Stocks: WestJet Stock, RioCan Stock and More.
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Growth Stocks Library Archives
The mortgage crisis continues to weigh not just on financial stocks, but on the overall stock market. That’s mainly because investors are bracing themselves for much worse news than we’ve seen so far, such as much higher mortgage defaults. Investors also worry that Washington’s plan to buy up bad mortgage loans and illiquid securities, at a cost of up to $700 billion, will spur much higher inflation. But this will only happen if we see much higher default rates, plus much deeper house-price drops. We see little reason to worry about these extreme outcomes. As investors become more familiar with the situation, fears may ease. The stock market is likely to stay volatile until after the November election. After that, we could see a six-month rebound in prices....
Restaurant sales have generally slowed in the United States in the past year, due to high gasoline prices and lower consumer confidence in the wake of the housing market slowdown. This has hurt consumer spending. However, sales of less expensive fast food remain strong, particularly in developing regions such as Asia and Latin America. As market leaders, McDonald’s and Yum will continue to benefit from growing global demand for fast food. Their strong brands also make it easier for them to pass along higher food and labor costs. MCDONALD’S CORP. $61 (New York symbol MCD; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 1.1 billion; Market cap: $67.1 billion; WSSF Rating: Above average) operates over 31,400 fast food restaurants in 118 countries....
SYSCO CORP. $32 (New York symbol SYY) plans to buy back 20 million of its shares, or about 3% of the total outstanding. It will also repurchase the remaining 3 million shares remaining under its previous authorization. Share buybacks boost per share earnings and increase the proportionate ownership of the remaining stockholders. However, rising gasoline and other costs have hurt traffic at the restaurants Sysco supplies. Hold. PEPSICO INC. $70 (New York symbol PEP) aims to triple its operations in India over the next three years. That includes expanding manufacturing capacity and its marketing efforts. Growing demand for soft drinks and snack foods in fast-growing countries like India continues to help PepsiCo offset slower growth in the U.S. Buy. HONDA MOTOR CO. LTD. ADRs $31 (New York symbol HMC) plans to launch a new gasoline-and-electric hybrid compact car in 2009. That will help Honda compete with the top-selling Toyota Prius.
3M COMPANY $69 (New York symbol MMM; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 669.0 million; Market cap: $46.2 billion; WSSF Rating: Above average) is one of the world’s largest industrial companies and is an example of the kind of blue chip stocks that can pay off for investors. It makes over 50,000 products in six main areas: Industrial and Transportation (30% of revenue); Health Care (16%); Display and Graphics (16%); Consumer and Office (14%); Safety, Security and Protection (13%); and Electro and Communications (11%). Major brands include Post-it notes, Scotch tape, Scotchguard protection and Thinsulate insulation. Like many of our favourite blue chip stocks, the company’s broad product base cuts its reliance on a single industry or customer. It also sells its products in over 60 countries, which limits its exposure to a single geographic area. Overseas sales now account for about two-thirds of 3M’s sales.
Cost savings help expand earnings
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IDEXX LABORATORIES INC. $58 (Nasdaq symbol IDXX; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 60.3 million; Market cap: $3.5 billion; WSSF Rating: Average) has gained 20% in the past three months, mainly due to higher-than-expected earnings. In the second quarter of 2008, Idexx’s earnings grew 85.3%, to $0.63 a share from $0.34 a year earlier. The year-earlier quarter included writedowns and other items that cut earnings by $0.11 a share. However, if you disregard these items, earnings in the latest quarter still grew 43.2%. Revenue rose 18.4%, to $280.6 million from $237.0 million, thanks mainly to strong demand for veterinary diagnostic equipment and water testing kits. However, Idexx had to discontinue an insulin treatment for cats due to shortages of raw materials. Strong demand for this product helped drive sales, and added $0.09 a share to earnings in the latest quarter. Idexx is developing a replacement product, but it will take several months for it to receive regulatory approval....
KRAFT FOODS INC. $33 (New York symbol KFT; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 1.5 billion; Market cap: $49.5 billion; WSSF Rating: Above average) has replaced troubled insurance provider American International Group Inc. in the Dow Jones Industrial Average. This 112-year-old index of 30 stocks is one of the most widely followed stock market indexes in the world. Many institutional investors and mutual funds aim to mimic the Dow, so this move will certainly increase their interest in Kraft. Kraft Foods is a buy. CEDAR FAIR L.P. $22 (New York symbol FUN; Income Portfolio, Consumer sector; Units outstanding: 55.1 million; Market cap: $1.2 billion; WSSF Rating: Average) reports that its revenues through Labor Day were $852 million, up 3% from the same period in 2007. Cedar Fair earns most of its money in the summer when all of its amusement parks are open. During this time, attendance rose 3%. If you disregard one of its parks that closed in 2007, attendance grew 5%. However, average in-park guest spending was unchanged....
DIEBOLD INC. $33 (New York symbol DBD; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 65.8 million; Market cap: $2.2 billion; WSSF Rating: Average) is currently restating its financial statements to adjust for a change in the way it recognized revenue from certain sales of automated teller machines (ATMs). The company now aims to soon file its updated results for 2007 and the first two quarters of 2008. The stock continues to trade below the $40.00-a-share takeover offer from UNITED TECHNOLOGIES CORP. $60 (New York symbol UTX; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 964.4 million; Market cap: $57.9 billion; WSSF Rating: Above average). Diebold has rejected the offer as too low, but its accounting problems make it difficult for United Technologies to increase its offer. Diebold continues to win new ATM orders, and bringing its financial statements up to date will cut its risk. However, further delays could prompt United Technologies to drop its takeover bid. That could hurt Diebold’s stock price....
ADOBE SYSTEMS INC. $39 (Nasdaq symbol ADBE; Aggressive Growth Portfolio, Manufacturing & Industry sector; 530.4 million; Market cap: $20.7 billion; WSSF Rating: Average) earned $0.50 a share in its third fiscal quarter ended August 29, 2008, up 11.1% from $0.45 a year earlier. These figures exclude one-time items. The latest earnings also beat the consensus forecast 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 1.7% of its market cap. That gives the company plenty of room to finance new product development....
Traditional telephone companies like the three below continue to lose customers to cable companies, Internet-based phone services and other tech stocks. However, they are offsetting their telephone-business losses by entering the world of tech stocks. They’ve been offering faster-growing services, like wireless and high-speed Internet access. Essentially, they are fighting competition from tech stocks by becoming more like tech stocks themselves. Future revenues from these new services will also help them keep paying above-average dividends. VERIZON COMMUNICATIONS INC. $31 (New York symbol VZ; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 2.9 billion; Market cap: $89.9 billion; WSSF Rating: Average) provides telephone services to over 140 million customers in 28 states. Through 55%-owned Verizon Wireless, a joint venture with UK-based Vodafone, it also has 59 million wireless subscribers in 50 states....
Despite a stream of nerve-rattling financial news, starting with the failure of the first U.S. bailout package, the Dow Industrials and the S&P 500 managed to hold above Monday’s lows this week until just before Friday’s close. It’s a mistake to read too much into this, of course. But it is encouraging to see these two indexes move sideways in this depressing news environment. The plunge to new lows by the Canadian market reflects the heavy resources content in our economy and stock market. The Resources sector stands to suffer in an economic setback, and that’s already begun to happen with the drop in oil, copper and other metals. In addition to the decline in our market, our dollar lost nearly four cents this past week, relative to the U.S. dollar. We continue to recommend that you spread your investments our across the five main economic sectors, and devote around a quarter of your portfolio to U.S. stocks. Market turnarounds often occur in times of high volatility and bad news. Our advice is to resist any urge you may feel to sell good-quality stocks, just because you fear they may go lower....