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
ANHEUSER-BUSCH COMPANIES INC. $51.16, New York symbol BUD, gained nearly $2 on rumors it is thinking about merging with European brewer InBev. A merger would create the world’s largest brewer, and undoubtedly run into anti-trust problems in several countries. It would also take years of restructuring before the merged company started to realize any cost savings. Regardless of whether the deal goes through, we still like Anheuser-Busch’s long-term prospects. It has around 50% of the United States beer market, and this makes it easier for the company to pass along rising costs to consumers. Major investments in breweries in Mexico and China also add to its appeal. Anheuser-Busch is a buy....
STATE STREET CORP. $68.35, New York symbol STT, has agreed to acquire rival Financial Services Corp. in an all-stock transaction worth $4.5 billion, or roughly 20% of State Street’s market cap of $22.7 billion. Financial Services provides custodial and related services to institutional investors. State Street investors will own roughly 85% of the combined company. The company anticipates between $625 million and $675 million in pre-tax restructuring charges. But merging the two firms’ back offices and technology platforms should save State Street between $345 million and $365 million in the first two years, and bring additional savings in future years. State Street’s stock moved down on the news, due to concerns over the company’s ability to reach its cost savings targets. It may also have trouble hanging on to some Financial Services’ clients. The stock will probably stay in a narrow range until it realizes some of the benefits of the merger....
BARNES & NOBLE INC. $39 (New York symbol BKS) reported that same-store sales at its main Barnes & Noble chain fell 0.1% in the nine week period ended December 30, 2006. However, online sales rose 2.7%. Spending on new promotions will probably weigh on earnings, but sales should pick up later this year with the release of the next Harry Potter book. Buy. CINTAS CORP. $42 (NASDAQ symbol CTAS) has raised its annual dividend each year since becoming a public company in 1983. The new rate of $0.39 a share, up 11.4% from the old rate of $0.35, yields 0.9%. Buy. ADOBE SYSTEMS INC. $40 (NASDAQ symbol ADBE) earned $0.33 a share before one-time items in its fourth fiscal quarter ended December 1, 2006, up 10% from $0.30 a year earlier. Revenue grew 33.7%, to $682.2 million from $510.4 million. Adobe spends 21% of its revenue on research, so it’s more profitable than it seems. However, the company faces growing competition from larger software makers and freeware versions of its products. Hold.
SUPERVALU INC. $36 (New York symbol SVU; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 207.8 million; Market cap: $7.5 billion; WSSF Rating: Average) is the third-largest food retailer in the United States, behind Wal-Mart and Kroger. Its 2,500 stores account for 80% of its sales. The remaining 20% comes from its food wholesale operations, which supply about 2,200 grocery stores in 48 states with brand-name and private-label goods. Supervalu’s sales have hovered around $20 billion for the last five years (fiscal years end February 28). Profits rose from $1.80 a share (total $240.7 million) in 2002 to $2.36 a share ($334.2 million) in 2005, but slipped to $2.26 a share ($322.2 million) in 2006....
ALCOA INC. $32 (New York symbol AA; Conservative Growth Portfolio, Resources sector; Shares outstanding: 867.7 million; Market cap: $27.8 billion; WSSF Rating: Above average) has stayed in a narrow range in the past year. While aluminum prices have moved up nearly 20%, Alcoa’s high-cost smelters have cut into its profit margins. Alcoa has steadily replaced its older facilities with new, more energy efficient ones. It has also sold some of its less-profitable operations. These moves are starting to pay off. In the fourth quarter of 2006, earnings before one-time items jumped to $0.74 a share from $0.26 a year earlier. Sales rose 20.0%, to $7.8 billion from $6.5 billion. Aluminum demand should remain strong in 2007, thanks to spreading industrialization in Asia and the recovery of the commercial airplane industry. Thanks to its improving outlook, Alcoa plans to buy back 10% of its stock in the next three years. It has also raised its quarterly dividend 13.3%, from $0.15 a share to $0.17. The new annual rate of $0.68 yields 2.1%....
VERIZON COMMUNICATIONS INC. $38 (New York symbol VZ; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 2.9 billion; Market cap: $110.2 billion; WSSF Rating: Average) is slowly shifting away from its traditional telephone business into areas with higher growth potential. For example, it recently acquired business communication specialist MCI Inc. and spun off directory publisher Idearc Inc. Verizon has now agreed to sell its phone operations in Vermont, New Hampshire and Maine to FairPoint Communications Inc. (New York symbol FRP). The $2.7 billion price, about 2.5% of Verizon’s market cap, consists of $1.0 billion in FairPoint stock and $1.7 billion of debt securities. Verizon will probably use these securities to cut its long-term debt of $30.1 billion (0.65 times equity). Verizon plans to hand out its new FairPoint shares to its own investors — one for every 55 Verizon shares held — as a tax-deferred dividend. Verizon investors will own 60% of the combined company....
CHIPOTLE MEXICAN GRILL INC. (New York symbols CMG $58 and CMG.B $54; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 32.6 million; Market cap: $1.8 billion; WSSF Rating: Speculative) operates over 500 restaurants in 23 states. It uses fresh ingredients and traditional cooking methods to make a variety of Mexican dishes. Chipotle owns 98% of these restaurants. In January 2005, McDonald’s Corp. (see box next page) sold its Chipotle class A shares (one vote per share) to the public at $22.00 a share. In October, it handed out its class B shares (10 votes per share) to its own stockholders under a special exchange offer. Unlike a typical spin-off, only those McDonald’s stockholders that chose to participate received Chipotle stock. In the third quarter of 2006, Chipotle earned $0.36 a share, up 89.5% from $0.19 a year earlier. Revenue rose 28.3%, to $211.3 million from $164.7 million, mainly due to the opening of 30 new restaurants. On a same-store basis, sales grew 11.6%....
GAMESTOP CORP. (New York symbols GME $56 and GME.B $56; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 75.8 million; Market cap: $4.2 billion; WSSF Rating: Extra risk) sells new and used video game players and software through over 4,600 stores in the United States and 14 other countries. GameStop was a wholly owned subsidiary of Barnes & Noble Inc. up until February 2002. That’s when Barnes & Noble sold its GameStop class A common shares (one vote per share) to the public at $18 each. In November 2004, Barnes & Noble handed out its GameStop class B shares (10 votes per share) to its investors as a special dividend. GameStop now wants to convert the class B shares into class A shares, which would improve liquidity. The conversion requires stockholder approval....
Many studies show that one of the best ways for a company to unlock hidden value is to spin off a subsidiary as a separate company. Shares of the new company sometimes fall in the first few months, as many investors tend to sell their new stock. But over time, both the parent and the spin-off usually outperform comparable stocks. In the past two years, several of our recommendations have completed spin-offs. All of these new companies have done well. That’s not surprising, since they came from well-managed parent companies with long histories of rising profits. Here are five recent spin-offs. We like all of them, but only three are buys right now....
We always try to strike a balance in the information we provide — not too little and not too much. One bit of information that doesn’t get the attention it deserves is a company’s market capitalization or “market cap”. This is the value of all common stock it has outstanding. When analyzing a stock, we of course always look at its market cap. Now we have decided to add this figure to the information we routinely provide to you at the beginning of each of our recommendations....