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
UNISYS CORP. $6 (New York symbol UIS; WSSF Rating: Average) cut its losses in the three months ended March 31, 2006, to $0.08 a share (total $27.9 million) from $0.13 a share ($45.5 million) a year earlier, due to gains on the sale of assets and savings from a restructuring plan. Revenue crept up to $1.39 billion from $1.37 billion. Sales growth will probably remain weak until Unisys launches new server computers in the second half of 2006. The company aims to cut its annual costs by $250 million by the end of 2007, but restructuring charges will depress its earnings. Unisys is a sell....
NEWMONT MINING CORP. $58 (New York symbol NEM; WSSF Rating: Average) earned $0.47 a share from continuing operations in the three months ended March 31, 2006, up sharply from $0.19 a year earlier. If you disregard a one-time tax benefit, Newmont would have earned $0.36 a share in the latest quarter. Revenue rose 21.7%, to $1.15 billion from $945 million, as gold prices rose 31%. Newmont will probably sell between 6.1 million ounces and 6.25 million ounces of gold in 2006, down from an earlier forecast of 6.26 million, mostly due to geologic instability at its mine in Indonesia. However, rising gold prices should more than make up for any loss in revenue. Higher gold prices will also offset rising operating costs. Newmont’s cost per ounce is likely to rise from $236 in 2005 to between $280 and $295 this year. The stock trades at a high 39.7 times its likely 2006 profit of $1.46 a share. Gold enthusiasts routinely pay multiples in that range, and Newmont’s policy of not hedging its sales should help it take full advantage of rising gold prices....
Widely predicted financial calamities rarely do much harm to the market or economy. Even if the facts are correct, the calamity never materializes since the predictions give investors and businesses plenty of warning. The best recent example was the late-1990s Y2K scare. It predicted a rash of computer failures for the start of the year 2000, since computers couldn’t distinguish 1900 from 2000. Nothing much came of it. We could soon see a widely predicted calamity that turns out to be a blessing in disguise. I’m talking about the hoards of U.S. dollars that are building up overseas....
ALCOA INC. $35 (New York symbol AA; WSSF Rating: Above average) is the world’s largest producer of aluminum. It also makes a wide variety of aluminum and non-aluminum products, such as food containers and automotive parts. Worldwide aluminum consumption will probably double over the next 15 years, mostly due to spreading prosperity in Asia and other developing regions. Alcoa aims to take advantage of this growth with new smelters and other facilities that will increase its total output. It recently upgraded its facilities in Australia and Brazil, and plans to open major new smelters in Iceland and Norway next year....
MCKESSON CORP. $48 (New York symbol MCK; WSSF Rating: Above average) gets about 90% of its revenue and profits from supplying drugs to retail pharmacies, hospitals and clinics. In 2005, the company changed the way it deals with pharmaceutical makers. Under the old method, McKesson earned most of its money from the spread between the price it paid for bulk drugs and price it charged customers. You might say it was speculating on drug prices, and this greatly added to its risk. Under its new method, McKesson earns a fee for distributing drugs. Thanks to this new policy, revenue at this business rose 9% in the company’s third fiscal quarter ended December 31, 2005....
Drug stocks have a special appeal for many investors. They assume that as the baby-boom generation goes through late middle age and beyond, demand for drugs will skyrocket. That’s undoubtedly true. As we’ve often pointed out, however, this leads investors to underestimate the risks in drug stocks. Drug companies often invest tens if not hundreds of millions of dollars to create, test and secure regulatory approval for a single new drug. Even then, it may not manage to recover its investment before its patent expires or a better drug hits the market....
IDEXX LABORATORIES INC. $83 (Nasdaq symbol IDXX; WSSF Rating: Extra risk) has unveiled a plan to spend $100 million over the next 20 years to expand its headquarters in Maine. That plan may require numerous adjustments as the years pass, but we think the company has an attractive long-term outlook. Idexx makes equipment that veterinarians use to detect diseases in domestic pets and livestock. It also makes veterinary drugs. It stands to gain from rising pet ownership levels, and fears of disease in domestic and wild animal populations, such as mad cow disease and avian flu. The stock has soared since we first recommended it at $28 in our May, 2002 issue. It now trades at 33.7 times its forecasted 2006 profit of $2.46 a share and 4.2 times its sales of $19.92 a share. This leaves it vulnerable if it reports even a temporary downturn in earnings....
Wal-Mart tried but failed to complete a couple of banking acquisitions, one in 1999 and the other in 2002. Now it wants to form its own bank subsidiary, and has applied for an industrial banking license. Predictably, the proposal is drawing stiff opposition from banks and consumer advocates. They claim Wal-Mart’s clout would let it run small banks out of business. Wal-Mart says it has no plans to open retail branches in its stores, but it could one day reverse that decision. Sooner or later, Wal-Mart is likely to launch its own bank. Though it may start out with heavy restrictions on its activities, its strength in information technology would help it keep its costs low. It could make substantial savings just by processing its own credit card and other electronic transactions, instead of paying fees to other banks.
We’ve always had a high opinion of Wal-Mart, but we stayed out of the stock in this decade because it violated the second of our three key rules for investment success: Downplay stocks that are attracting excess attention from brokers and the media. (Just to refresh your memory, our first rule is to invest mainly in well-established companies; our third rule is to spread your money out across most if not all of the five main economic sectors.) From 1996 through the end of 1999, Wal-Mart’s sales and per-share earnings doubled. That drew the attention of huge pension funds that want to invest in growth, but didn’t want to overindulge in the Internet and tech mania of those years. As Wal-Mart gained, momentum traders joined in the buying. Trading and liquidity expanded, and Wal-Mart rose from $10 to $70. At its 2000 peak, it traded above 50 times earnings. Wal-Mart’s sales and per-share earnings roughly doubled in the next seven years, then went into a six-year slump. The stock is now one-third below its peak, and trades at around 16 times earnings....
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