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
VERIZON COMMUNICATIONS INC. $38.23, New York symbol VZ, owns 55% of Verizon Wireless, a joint venture with UK-based Vodafone. Verizon Wireless has now agreed to buy privately held Alltel Corp., which provides wireless services to 13 million customers in mainly rural areas of 34 states. Verizon Wireless will pay $5.9 billion in cash and assume Alltel’s debt of $22.2 billion, for a total price of $28.1 billion. Verizon’s share works out to $15.5 billion, which is equal to 2.2 times the $6.9 billion or $2.37 a share it earned in 2007. After the merger, Verizon Wireless will be the largest wireless company in the United States, with over 80 million customers. The company aims to complete the takeover by the end of this year. Alltel and Verizon use similar cellular technologies, so Verizon should have few integration problems. Verizon feels the merger will generate annual cost savings of $1 billion in the second year after closing....
Washington Mutual Inc. recently cut its quarterly dividend, from $0.15 a share to $0.01. It now yields just 0.4%. The company needs to conserve capital in the face of rising loan losses and writedowns of mortgage-backed securities. As well, telephone directory publisher Idearc Inc. suspended its $1.37 dividend due to slowing advertising revenue. Consequently, we’re moving Washington Mutual and Idearc from the Income Portfolio to the Aggressive Growth Portfolio. We still see both as holds. Instead, we’re adding these three companies to our Income Portfolio:...
NEWMONT MINING CORP. $48 (New York symbol NEM; Aggressive Growth Portfolio, Resources sector; Shares outstanding: 453.5 million; Market cap: $21.8 billion; WSSF Rating: Average) is one of the world’s largest gold mining companies, with major operations in the United States, Canada, Peru, Australia, Indonesia and Ghana. It also produces other metals such as copper and zinc. Gold prices nearly tripled in the past five years, to reach a high of $1,003 an ounce in March 2008. Gold now trades at $905. However, Newmont’s shares have lagged the jump in gold prices. That’s mainly due to rising fuel, labor and steel costs. Start-up costs at new mines have also weighed on its earnings.
Unwinding hedges will pay off
The company recently unwound its remaining gold hedges — amounts of future production sold in advance at fixed prices. A large hedge position adds to profits when gold prices drop, but limits profits when prices rise. Eliminating these hedges puts Newmont in a better position to profit from rising spot prices....
LIMITED BRANDS INC. $19 (New York symbol LTD; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 340.7 million; Market cap: $6.5 billion; WSSF Rating: Average) reported higher-than-expected earnings for its first fiscal quarter ended May 3, 2008. If you exclude a gain from the sale of its interest in a joint venture and other one-time items, it earned $0.11 a share in the quarter, or 37.5% better than consensus forecasts of $0.08. Limited earned $0.13 a share in the year-earlier quarter. Total sales in the quarter fell 17.4%, to $1.9 billion from $2.3 billion, mostly due to last year’s sale of majority stakes in the Limited and Express clothing stores. However, plans to expand its Victoria’s Secret lingerie chain internationally should boost sales. Limited Brands is a buy.
SONY CORP. ADRs $48 (New York symbol SNE; Conservative Growth Portfolio, Manufacturing & Industry sector; ADRs outstanding: 1.0 billion; Market cap: $48.0 billion; WSSF Rating: Above average) is starting to enjoy the benefits of its recent restructuring plan. It earned $3.51 per ADR in its fiscal year ended March 31, 2008, up sharply from $0.99 in fiscal 2007. (Each American Depository Receipt represents one common share.) Sales grew 26.2%, to $88.7 billion from $70.3 billion, thanks to growing demand for its flat-screen TV sets and PlayStation 3 video game console. Sony has ended its partnership with Samsung, which supplied it with flat-screen panels. Instead, it will buy 34% of a new flat-screen plant that Sharp is building. Production should begin in 2010. Sony now plans to increase its annual dividend rate by 60%, from about $0.25 per ADR to $0.40. That implies an annual yield of 0.8%. It also plans to pay a special dividend of $0.10 per ADR....
ABB LTD. ADRs $33 (New York symbol ABB; Conservative Growth Portfolio, Manufacturing & Industry sector; ADRs outstanding: 2.3 billion; Market cap: $75.9 billion; WSSF Rating: Above average) earned $0.44 per ADR in the three months ended March 31, 2008, up 76.0% from $0.25 a year earlier. (Each American Depository Receipt represents one ABB common share.) Revenue grew 29.0%, to $8.0 billion from $6.2 billion, thanks to strong demand for electrical power infrastructure equipment in Asia and the Middle East. Orders rose 26.7%, to $10.9 billion from $8.6 billion. ABB has gained 37.5% since we first recommended it at $24 in our February, 2008 issue. Despite the rise, it still trades at a reasonable 19.4 times the $1.70 per ADR it will likely earn in 2008. ABB is a buy....
ENCANA CORP. $92 (New York symbol ECA; Conservative Growth Portfolio, Resources sector; Shares outstanding: 750.0 million; Market cap: $69.0 billion; WSSF Rating: Average) plans to split itself up into two companies — one focusing on natural gas, the other on oil sands and oil refineries. The gas company will keep the EnCana name, while the oil company will assume a new name. Stockholders will receive one new common share in each new company for every EnCana share they hold. Investors will not be liable for capital gains taxes until they sell their new shares. EnCana intends that the initial combined dividends of the two companies will be equivalent to its current annual dividend rate of $1.60 per share (1.7% yield). EnCana aims to complete the plan in early 2009....
MICROSOFT CORP. $28 (Nasdaq symbol MSFT; Aggressive Growth Portfolio, Manufacturing & industry sector; Shares outstanding: 9.3 billion; Market cap: $260.4 billion; WSSF Rating: Above average) aims to expand use of its Live.com search site with a new incentive plan called “Live Search cashback”. Under this plan, consumers can earn rebates on purchases of goods from over 700 participating merchants. Microsoft hopes to shift online advertising away from the current pay-per-click model to more concrete actions, such as a completing a purchase. That would increase the effectiveness on online ads, and let Microsoft charge more. The company unveiled the new plan after it dropped its hostile takeover offer for Internet search provider Yahoo! Inc. However, the two companies are now working on a possible alliance. That may include Yahoo selling its search-advertising business and Asian investments to Microsoft. An alliance would help both companies compete with industry leader Google Inc. Microsoft is a buy.
In a traditional spinoff, a company sets up a subsidiary as a separate company, then hands out stock in the new company to its stockholders as a special dividend. In many cases, the parent company will sell stock to the public ahead of the final spinoff date to establish a market for the new shares. As we’ve often pointed out, most spinoffs lead to above-average results for a period of years— for both the parent company and the company that gets created and spun off. We still see these four spinoff stocks as buys, but only for aggressive investors. BROADRIDGE FINANCIAL SOLUTIONS INC. $23 (New York symbol BR; Aggressive Growth Portfolio, Finance sector; Shares outstanding; 140.1 million; Market cap: $3.2 billion; WSSF Rating: Extra risk) was a subsidiary of Automatic Data Processing Inc. (ADP) until April 2, 2007. ADP investors received one Broadridge share for each ADP share held....
AUTODESK, INC. $40 (Nasdaq symbol ADSK; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 223.4 million; Market cap: $8.9 billion; WSSF Rating: Average) earned $0.50 a share in its first fiscal quarter ended April 30, 2008, up 13.6% from $0.44 a year earlier. These figures exclude one-time items. Revenue rose 17.7%, to $598.8 million from $508.6 million, thanks to favorable exchange rates and strong sales in emerging markets. Sales of the company’s advanced 3D design software (24% of total revenues) also contributed to the higher results. The stock now trades at 20.9 times this year’s forecast earnings of $1.91 a share. That’s reasonable in light of Autodesk’s growth prospects, and its high research spending (24% of revenue of $9.50 a share). Autodesk is a buy.