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
Rising prices for steel, copper and other raw materials have weighed on profits at all American industrial companies in the past few years. Higher oil prices have also made it more expensive to operate factories and transport goods to customers. The best way to profit from this uncertainty is to focus on high-quality stocks with unique products, high market shares and other factors that give them special appeal. These four industrial stocks have struggled lately, but we see them as a “heads-you-win, tails-you-break-even” situation. That means they should thrive during cyclical peaks, and keep losses to a minimum in economic downturns....
LIMITED BRANDS INC. $29 (New York symbol LTD; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 400.1 million; Market cap: $11.6 billion; WSSF Rating: Average) may be trying to sell its 658 Express and 260 Limited apparel stores to private investors. That could raise $1 billion, including the real estate connected to these chains. Limited Brands earned $676 million in the fiscal year ended February 3, 2007, down 1.0% from $683 million a year earlier. Per-share earnings grew 1.2%, to $1.68 from $1.66, due to fewer shares outstanding. If you exclude one-time gains in the prior fiscal year, per-share earnings rose 26.3%. Revenue grew 10.3%, to $10.7 billion from $9.7 billion, while same-store sales grew 7%. The Express and Limited chains account for about 20% of Limited Brands’ total revenue. But profits at these operations have lagged behind strong gains at the Victoria’s Secret (lingerie) and Bath & Body Works (personal care products) chains. Selling them would let Limited Brands focus on its faster-growing businesses, and give it cash to pay down its long-term debt of $1.7 billion (0.6 times equity)....
BANK OF AMERICA $51 (New York symbol BAC; Income Portfolio, Finance sector; Shares outstanding: 4.4 billion; Market cap: $224.4 billion; WSSF Rating: Above average) has agreed to pay $16 billion (after a return of excess capital) for LaSalle Bank Corp., which operates roughly 400 branches and offices in over 20 states. The purchase strengthens Bank of America’s retail operations, particularly in the Chicago area. However, the deal also increases Bank of America’s exposure to the slow-growing Michigan economy, which accounts for nearly 40% of LaSalle’s deposit base. It will probably cost Bank of America $800 million to integrate the new operations. But it feels the benefits from the purchase will offset these costs, and LaSalle should immediately increase its annual earnings by 2%....
MOTOROLA INC. $18 (New York symbol MOT; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 2.4 billion; Market cap: $43.2 billion; WSSF Rating: Above average) gets about 60% of its revenue from mobile phones. However, strong sales of entry-level models in China and other developing countries have hurt Motorola’s profits lately. In the three months ended March 31, 2007, Motorola lost $0.09 a share (total $218 million) from continuing operations. However, that figure includes $0.11 a share in unusual charges. The company earned $0.26 a share ($656 million) a year earlier. Revenue fell 2.1%, to $9.4 billion from $9.6 billion. Motorola now aims to spur long-term growth by focusing on higher-margin phones with advanced features. Consequently, it has agreed to pay $140 million for Terayon Communication Systems Inc., which makes chips that process video signals. This technology will improve the displays on Motorola’s phones, as well as make it easier for cellphone service providers to customize video programs and advertising for certain markets and users....
H&R BLOCK INC. $23 (New York symbol HRB; Conservative Growth Portfolio, Finance sector; Shares outstanding: 322.9 million; Market cap: $7.4 billion; WSSF Rating: Above average) has agreed to sell its Option One mortgage business, which specializes in loans to borrowers with poor credit histories, for about $300 million. That’s a lot less than this unit’s tangible book value of $1.3 billion, so the company will record a pre-tax non-cash charge of up to $320 million on the sale. To put that in perspective, H&R Block earned $0.08 a share (total $25.0 million) from continuing operations in its third fiscal quarter ended January 31, 2007. Getting out of the mortgage business cuts the company’s exposure to rising defaults in the subprime segment of the mortgage industry. It will also let H&R Block focus on expanding its more profitable operations, such as tax preparation, banking and accounting services....
Some of the most profitable investments you’ll ever make come with hidden or widely under-valued assets such as brand names. Successful brands can help maintain and expand sales of existing products, and aid in the marketing of new ones. A good example is Tupperware. Its brand of plastic food-storage containers became world famous in the 1950s. But the much joked about Tupperware party is also an overlooked asset. It keeps the company’s marketing costs low, and could provide it with a competitive selling edge in a variety of industries. Tupperware is now using this unique selling model in the beauty products business. One day it could use it sell totally unrelated products such as mutual funds....
INTERNATIONAL BUSINESS MACHINES CORP. $101 (New York symbol IBM; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 1.5 billion; Market cap: $151.5 billion; WSSF Rating: Above average) has increased its quarterly dividend by a third, from $0.30 a share to $0.40. The new annual rate of $1.60 yields 1.6%. The company also expanded its stock repurchase plan by $15 billion. It’s now authorized to buy back $16.4 billion, or about 10%, of its outstanding shares. That should increase IBM’s earnings per share in 2007 by between 12% and 14%. IBM has $10.8 billion ($7.20 a share) in cash, so it will have to finance at least part of the buyback with new debt. IBM’s long-term debt of $14.3 billion is 0.5 times equity, so it can comfortably afford to borrow more. Since it will have fewer shares outstanding, it can use the savings from dividend payments to pay down the extra debt....
AASTRA TECHNOLOGIES $34.25 (Toronto symbol AAH; SI Rating: Speculative) (905-760-4200; www.aastra.com; Shares outstanding: 16.0 million; Market cap: $548.0 million) develops and markets products and systems for accessing communication networks, including the Internet. Aastra’s products include residential and business telephone terminals, screen telephones capable of accessing Internet content, cable modems, network access servers and digital video encoders, decoders and gateways for the broadcast, cable and telecommunications market. To cut risk, Aastra outsources all of its manufacturing. In the three months ended December 31, 2006, Aastra’s revenues fell 1.4%, to $160.8 million from $138.4 million. Earnings per share rose 109.9%, to $0.70 from $0.34. Sales in the Europe remained flat in the fourth quarter at $134.6 million. However, sales in North America fell 9.0% to $26.7 million, primarily as a result of weaker analog and digital terminal sales....
IPSCO INC. $170.41 (Toronto symbol IPS; SI Rating: Average) (800-667-1616; www.ipsco.com; Shares outstanding: 47.2 million; Market cap: $8.0 billion) may now have a second potential bidder, Nasdaq-listed Steel Dynamics, the fifth-largest U.S. steel maker. The other possible buyer is reportedly Evraz Group SA, Russia’s biggest steel company. IPSCO jumped recently after the company announced that it has entered into discussions that could lead to a sale of the company. The stock is up 61% since we recommended it in the February, 2007 issue of Stock Pickers Digest at $106 a share. IPSCO is too economically sensitive for us to want to recommend it at current prices, especially since it owes much of its recent strength to takeover speculation....
CENTERRA GOLD $11.78 (Toronto symbol CG; SI Rating: Speculative) (416-204-1953; www.centerragold.com; Shares outstanding: 216.2 million; Market cap: $2.5 billion) dropped from around $12.50 to as low as $10.25 in late March in response to reports that the parliament of the Kyrgyz Republic was discussing a bill that challenges the legality of the 2004 restructuring agreement that covers Centerra’s Kumtor gold mine. The bill would let the government collect additional royalties and taxes dating back to 1992, and expropriate gold deposits in the country. Since then, the newly appointed Prime Minister of the Kyrgyz Republic, Almazbeck Atambaev, has stated that it would not nationalize any gold mines. Even so, Centerra believes that the parliamentary action will still be used as a negotiating tactic to extract a new contract on more favorable terms. Centerra and the Kyrgyz Republic agreed to a restructuring of the Kumtor contract in 2004, when gold was around $425 U.S. per oz. Now that gold is up over $650, the Kyrgyz Republic wants more money....