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
MCDONALD’S CORP. $45.78, New York symbol MCD, has sold only Coca-Cola soft drinks at its restaurants since 1955. But demand for carbonated sodas has weakened in the past few years, as consumers switch to healthier drinks. So McDonald’s has begun selling non-carbonated drinks from PepsiCo at some of its outlets. PEPSICO INC. $63.68, New York symbol PEP, drinks now sold at these McDonald’s outlets include Gatorade sport drinks, Tropicana fruit juices and Lipton iced teas. The deal does not cover Pepsi or Diet Pepsi colas, or fountain drinks. If this pilot project succeeds, McDonald’s will probably expand it to other stores. We see both McDonald’s and PepsiCo as buys....
WEYERHAEUSER CO. $75 (New York symbol WY) has merged its fine paper operations with Canadian paper producer Domtar Corp. (New York symbol UFS). Stockholders that chose to participate received 11.1442 shares of Domtar for each Weyerhaeuser share tendered. The deal lets Weyerhaeuser focus on its core lumber operations. Buy. PROCTER & GAMBLE CO. $63 (New York symbol PG) contracts some of its Iams and Eukanuba brand pet food operations out to third parties, including Menu Foods Inc. which has recalled some of its products due to possible contamination. Procter does not have a long-term contract with Menu Foods. But the pet food industry is highly concentrated, so it could have trouble shifting to a new supplier. Still, pet food accounts for less than 4% of Procter’s earnings. Buy. SHERWIN-WILLIAMS CO. $66 (New York symbol SHW) has agreed to pay an undisclosed sum for M.A. Bruder & Sons Inc. The deal will increase its annual revenue by 2%, and expand its share of the professional painting contractor market. But the uncertainty over lead paint clean up costs adds to Sherwin’s risk. Hold.
TENNANT CO. $31 (New York symbol TNC; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 18.8 million; Market cap: $582.8 million; WSSF Rating: Average) makes industrial floor cleaning equipment, including scrubbers, sweepers and polishers. It also makes outdoor cleaning equipment for garages, stadiums, parking lots and city streets. North America accounts for two-thirds of its revenue.
Receives little media attention
Most investors and their brokers have probablynever heard of Tennant. It operates in a narrow field that generates little media coverage compared to, say, computer software. But the company has a long history of steadily rising revenues and profits. Tennant’s revenues grew from $424.2 million in 2002 to $599.0 million in 2006, or 9.0% compounded annually. Earnings grew at a compound annual rate of 23.3%, from $0.68 a share (total $12.3 million) in 2002 to $1.57 a share ($29.8 million) in 2006....
CONAGRA FOODS INC. $25 (New York symbol CAG; Income Portfolio, Consumer sector; Shares outstanding: 505.2 million; Market cap: $12.6 billion; WSSF Rating: Above average) has shut down its peanut butter operations due to possible salmonella contamination. The company makes the Peter Pan brand of peanut butter, as well as private label brands for supermarkets. The recall of these products will cost ConAgra between $50 million and $60 million, excluding lost sales. It will probably take two to three months before production resumes. Meanwhile, the company is enjoying the benefits of its latest restructuring plan. In its third fiscal quarter ended February 25, 2007, profits from continuing operations rose grew 94.7%, to $0.37 a share (total $186.5 million) from $0.19 a share ($97.7 million) a year earlier. Revenue rose 2.1%, to $2.92 billion from $2.86 billion. The stock has held up well despite the recall, and now trades at 18.9 times the $1.32 a share it should earn in fiscal 2007 before one-time items. ConAgra’s improving outlook should let it raise its $0.72 dividend, which yields 2.9%....
ADOBE SYSTEMS INC. $42 (Nasdaq symbol ADBE; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 588.0 million; Market cap: $24.7 billion; WSSF Rating: Average) earned $0.30 a share in its first fiscal quarter ended March 2, 2007, down 6.3% from $0.32 a year earlier. These figures exclude costs related to the integration of Macromedia Inc. and other unusual items. Revenue fell 0.9%, to $649.4 million from $655.5 million. Customers are holding off upgrading their photo editing and design programs until Adobe releases new versions later this year. The company continues to spend over 20% of its revenue on research, so it’s more profitable than it looks. But at nearly 50 times earnings, the stock is vulnerable to bad news. Adobe also faces competition from freeware versions of some of its software....
Cedar Fair and Buckeye Partners are Master Limited Partnerships (MLPs). Investors that hold units in them have similar rights to ownership and dividends as common stockholders in regular corporations. MLPs pay out most of their income to investors, which lets them avoid federal and state income taxes. The IRS treats distributions from MLPs differently than regular dividends, and investors may have to file an extra form with their tax returns. Tight restrictions at the time of formation often prevent MLPs from expanding into unrelated lines of business. This limits their ability to cut risk with diverse revenue streams. That’s why it’s important to focus on high-quality MLPs that have a long history of expanding their sales, cash flow and asset bases, such as Cedar Fair and Buckeye.
CEDAR FAIR L.P. $29 (New York symbol FUN; Income Portfolio, Consumer sector; Units outstanding: 54.1 million; Market cap: $1.6 billion; WSSF Rating: Average) is a Master Limited Partnership that owns 12 amusement parks, six water parks and six hotels. In 2006, Cedar Fair’s profits fell 45.7%, to $1.59 a unit (total $87.5 million) from $2.93 a unit ($160.9 million) in 2005. Most of the drop is due to higher interest and depreciation costs following Cedar Fair’s $1.24 billion purchase of five Paramount theme parks. The new assets increased revenue for the year by 46.2%, to $831.4 million from $568.7 million. On a same-park basis, revenue fell less than 1%. Most people travel by car to these parks, so higher gas prices hurt attendance. But higher in-park spending and other revenues helped offset this....
MOODY’S CORP. $62 (New York symbol MCO; Conservative Growth Portfolio, Finance sector; Shares outstanding: 278.5 million; Market cap: $17.3 billion; WSSF Rating: Average) provides independent credit ratings and other information on bonds and other securities issued by over 200,000 commercial and government entities in over 100 countries. The company also provides credit assessment services and software to banks and other lenders. In 2006, Moody’s earned $2.41 a share (total $704.8 million), up 25.5% from $1.92 a share (total $585.3 million) in 2005. These figures exclude a gain on the sale of a building and other one-time items. Revenue rose 17.6%, to $2.0 billion from $1.7 billion. Moody’s cash flow before unusual items rose 10.4%, to $2.54 a share in 2006 from $2.30 a year earlier. The company is using its growing cash flow to buy back stock. It spent $1.1 billion on buybacks in 2006, and still has $1.8 billion remaining on its current authorization. Moody’s will probably increase its $0.32 dividend, which yields 0.5%....
APPLE INC. $93 (Nasdaq symbol AAPL; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 861.9 million; Market cap: $80.2 billion; WSSF Rating: Extra risk) has started shipping its new “Apple TV” set-top device, about a month behind its original schedule. This product uses wireless technology to transfer movies and other videos from a computer to a regular TV set. By making it easier to watch these shows on a TV instead of a computer screen, Apple hopes to spur more downloads from its iTunes web site. This product has the potential to dominate this niche, much in the same way the iPod captured the bulk of the music player market. But at 30 times earnings, Apple is vulnerable to a big setback if earnings fail to meet expectations. The SEC is still investigating the company’s stock option practices, which adds to its risk. Apple is a hold.
Advertisers continue to shift spending to Internet sites and away from newspapers and other print publications. But these three leading publishers are doing a good job adapting their businesses to the Internet, and profiting from it. They own some of the best-known brands in this industry, which gives their online properties instant credibility. Strong web sites also make it easier for them to attract advertisers with custom packages that include a variety of platforms. We feel all three will thrive as they expand their Internet activities. But only two are buys right now....