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
One of the ways a company can try to unlock its own hidden value is by creating a separate company out of a subsidiary. The parent company can either sell stock in the new company to the public, or spin it off — hand the stock out to its own investors. In the past few years, it has become common to do both. The parent company starts by selling a portion of the new company to the public, to establish a market and a following among investors. That way, by the time of the spin-off, stock in the new company may be liquid enough to be sold relatively easily, or retained with some confidence as a worthwhile investment. In our experience, and in most academic studies of the subject, this helps the parent and the spin-off. Both generally do better than comparable companies for at least several years after the spin-off takes place. We would never invest purely because of a spin-off, of course, because there is no guarantee of this “spin-off bonus”. However, it’s certainly a plus....
MCDONALD’S CORP. $40 (New York symbol MCD; Conservative Growth Portfolio, Consumer sector; WSSF Rating: Above average) is giving its stockholders an opportunity to exchange their McDonald’s stock for a holding in its Mexican food subsidiary. CHIPOTLE MEXICAN GRILL INC. $50 (New York symbol CMG) is an 50.8%-owned McDonald’s unit that operates 500 Mexican food restaurants in 23 states. This past January, Chipotle sold “A” shares (one vote per share) to the public at $22 each. McDonald’s offer lets its investors exchange all or some of their shares for Chipotle Class B common shares (10 votes per share; New York symbol CMG.B). The company will calculate the final exchange ratio before the offer expires on October 5, 2006....
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FORD MOTOR CO. $8 is taking steps to survive today’s disastrous car market. It cut its dividend in half (but it still yields 2.5%), and it is cutting production by 20%. Ford could raise cash by selling assets such as its luxury brands. When the car market improves, Ford’s high sales (now around $95 a share) provide a lot of leverage for improved earnings. That’s why we see it as a hold. H.J. HEINZ CO. $41 seems to have fended off a proxy challenge from billionaire investor Nelson Peltz. That will make it easier for Heinz to implement its own restructuring plan, but ongoing pressure from Peltz should continue to push the stock higher. Buy. BANK OF AMERICA $52 has raised its dividend 12.0%, from $2.00 a share to $2.24. It now yields 4.3%. Best Buy....
WELLS FARGO & CO. $35 (New York symbol WFC; Conservative Growth Portfolio, Finance sector, WSSF Rating: Average) is the fifth-largest bank in the United States, with assets of $499.5 billion. It operates over 3,000 retail branches, mostly in Western and Midwestern states. It also has 1,000 home mortgage offices. Wells Fargo’s revenue rose from $20.2 billion in 2001 to $32.9 billion in 2005, or 13.0% compounded annually. Its earnings grew at a compounded annual rate of 22.8%, from $0.99 a share (total $3.4 billion) in 2001 to $2.25 a share ($7.7 billion) in 2005 (all per share amounts adjusted for 2-for-1 stock split in August 2006). In the three months ended June 30, 2006, earnings rose 10.7%, to a record $0.62 a share (total $2.1 billion) from $0.56 a share ($1.9 billion) a year earlier. Revenue rose 11.4%, to $8.8 billion from $7.9 billion....
CALGON CARBON CORP. $4.58 (New York symbol CCC; Aggressive Growth Portfolio, Manufacturing & Industry sector; WSSF Rating: Average) lost $6.7 million or $0.17 a share before one-time items in 2005. That violated the terms of some of its long-term loans, and forced Calgon to re-classify these loans as short-term. Calgon now plans to pay down these loans by issuing up to $75 million in new, 30-year debentures convertible into common shares at $5.10 a share. Investors dislike convertible debt issues since they can raise the number of shares a company has outstanding and cut into future per-share earnings growth. The conversion of all of the debentures would increase the number of shares outstanding by a third. The news triggered a 27% drop in Calgon’s stock price. Calgon’s water purification technology has strong growth potential, and it continues to win new contracts, including a recent deal to supply granular activated carbon to a city in South Korea. But the threat of a large share dilution will probably limit the stock’s progress for the next several years....
SONY CORP. ADRs $44 (New York symbol SNE; Conservative Growth Portfolio, Manufacturing & Industry sector; WSSF Rating: Above average) will have to absorb part of the $400 million cost to recall faulty batteries it sold to computer maker Dell Inc. Sony feels the recall will have only a small effect on its profits. In its first fiscal quarter ended June 30, 2006, Sony earned $0.27 per ADR (total $281 million). It lost $0.08 per ADR ($66 million) a year earlier. Each American Depository Receipt represents one common share. After several delays, the company now plans to launch its new PlayStation 3 video game player on November 17. Although priced higher than competing products, PlayStation 3’s advanced features should make it a strong seller....
TOYOTA MOTOR CORP. ADRs $110 (New York symbol TM; Conservative Growth Portfolio, Manufacturing & Industry sector; WSSF Rating: Above average) earned $2.00 per ADR in its first fiscal quarter ended June 30, 2006, up 31.6% from $1.52 a year earlier. (Each American Depository Receipt equals two common shares.) Sales rose 6.3%, to $49.0 billion from $46.1 billion. Many Toyota vehicles share the same parts. That helps keep its costs down, and gives it greater clout with suppliers. But it also increases the cost of recalls. Due to a defective part, the company has had to recall over one million vehicles worldwide in the past few months. However, it’s unlikely that these recalls will damage Toyota’s reputation....
ALLIANT ENERGY CORP. $36 (New York symbol LNT; Income Portfolio, Utilities sector; WSSF Rating: Average) supplies electricity and gas to over 1.4 million customers in four Midwestern states. It also provides engineering and consulting services to other utilities. In the three months ended June 30, 2006, Alliant earned $0.39 a share (total $46.1 million) before unusual items, down 4.9% from $0.41 a share ($47.5 million) a year earlier. Revenue slipped to $696.8 million from $699.8 million. Thanks to recent asset sales, capital expenditures should drop from $4.51 a share in 2005 to $4.00 in 2006. However, new investments in wind power will probably increase capital spending to $5.00 in 2007....
WAL-MART STORES INC. $44 (New York symbol WMT; Conservative Growth Portfolio, Consumer sector; WSSF Rating: Above average) is refining its international expansion plans, including pulling out of less profitable countries like South Korea and Germany, and focusing on its successful foreign operations in Canada, Mexico, China and Brazil. If you exclude losses from its recently sold overseas businesses, Wal-Mart earned $0.72 a share in its second fiscal quarter ended July 31, 2006, up 5.9% from $0.68 a year earlier. Sales rose 11.3%, to $84.5 billion from $75.9 billion. Same-store sales in the United States rose 1.7%. Fears that rising fuel costs would cut consumer spending have hurt the stock’s progress in the past few months. Customers are making fewer trips, but they’re spending more per visit. Although costs to remodel some older stores and add trendier apparel brands will hurt its short-term earnings growth, Wal-Mart should reach its earnings target of $2.92 a share in the current fiscal year. The stock trades at 15.1 times that figure....