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Yankee doodle dandies
the top 1000 U.S. stocks The MoneySense Top 200 was a rousing success over the past year in helping readers to evaluate Canadian stocks, but we heard from many investors who wanted even more. Several readers suggested we turn our eyes to the vast markets to the south of us and evaluate U.S. stocks in the same way. Your wish is our command. This year we've expanded our successful stock selection method to cover 1,000 of the largest stocks in the U.S. We've focused only on the very best stocks and moved our giant Top 1,000 U.S. Stocks table online with all the detailed information that you've come to expect from the Top 200. Don't be shy. Download the entire table - it's free. We started our search for U.S. beauties by looking through the largest 1,000 common stocks by revenue in the Russell 3000 index. We ranked each stock two ways, just as we did for the Canadian Top 200. One of our rankings evaluates the stock as a value investment, the other evaluates it as a growth investment. The grades range from a top-of-the-class A down to a bottom-of-the-heap F. The only big difference between our Canadian and U.S. ranking methods was the number of stocks involved. While 22 Canadian stocks picked up an A for value, for instance, five times as many stocks got a top grade for value in the U.S. Given the wealth of interesting stocks in the U.S., we decided to focus on the very best: the handful of stocks that scored a double A, earning top marks both for value and growth appeal. Only seven stocks managed to join this honored group. Before looking under the hood at each double-A stock, let's review the extraordinary qualities needed to get on the list. On the value front, double-A stocks have modest price-to-earnings, price-to-sales and price-to-book value ratios. In addition, they all pay a dividend and have relatively little debt compared to industry norms. On the growth side, the double-A stocks have demonstrated strong three-year revenue and earnings-per-share growth, and have generated healthy returns on equity. A good dose of one-year momentum rounds off the attractive characteristics of these elite double-A stocks. Only 0.7% of the Top 1,000 stocks managed to meet all of our strict criteria. Given the wealth of interesting stocks in the U.S., we decided to focus on the very best: the handful of stocks that scored a double A, earning top marks both for value and growth appeal. Only seven stocks managed to join this honored group. Before looking under the hood at each double-A stock, let's review the extraordinary qualities needed to get on the list. On the value front, double-A stocks have modest price-to-earnings, price-to-sales and price-to-book value ratios. In addition, they all pay a dividend and have relatively little debt compared to industry norms. On the growth side, the double-A stocks have demonstrated strong three-year revenue and earnings-per-share growth, and have generated healthy returns on equity. A good dose of one-year momentum rounds off the attractive characteristics of these elite double-A stocks. Only 0.7% of the Top 1,000 stocks managed to meet all of our strict criteria. Keep in mind that these stocks are controversial. After all, strong growth is rarely to be had at rock-bottom prices without risk. Here's the lowdown on each top stock. (All figures in U.S. dollars.) Phelps Dodge is the largest of our double-A companies. The firm dug up $8.6 billion in sales over the last 12 months - and dug is the operative word because the company mines copper and molybdenum throughout the world; it also turns its copper into wire and cable. Strong copper prices have boosted profits at Phelps Dodge and the company trades at only 7.4 times earnings, which is low by any standard. Dividend-oriented investors will be happy to hear that the company expects to pay a special dividend of $5 per share in early December on top of its regular 1% dividend yield. Conservative investors will be equally delighted to learn that the company has about $24 per share in the bank and only owes its creditors about $7 per share. What does it expect to do with its extra pennies? Put them toward share repurchases and additional special dividends. WPS Resources is a gas and electric utility with operations in Wisconsin and Michigan. It also conducts non-regulated power and energy businesses in Illinois, Maine, and Ohio. As a utility with a generous dividend yield of 4.2% - the highest regular dividend yield of The super seven - WPS should appeal to more conservative income-oriented investors. Commerce Group is one of our smaller stocks, with revenues of $1.9 billion. The property and casualty insurance company provides auto insurance to customers in Massachusetts and several other states. Profits have been strong at Commerce, but its stock price has fallen from a record high of $70 earlier in the year. Investors appear to be worried about flack from politicians and drivers who are tired of paying high premiums for auto insurance from Commerce Group and the industry in general. But why complain? You can put the shoe on the other foot and take advantage of the situation by owning an insurance company. Modine Manufacturing produces heating and cooling systems used in vehicles, industrial equipment, and electronics. The company has turned a profit in each of the last 10 years, but its earnings dipped a couple of years ago. Modine has largely recovered from the slump, but its profit margins remain depressed compared to the firm's historic levels. Its stock could provide generous returns if the company manages to boost its margins. The final three double-A stocks happen to be old favorites that I've been following, off and on, for several years. They were brought to my attention when I was searching for stocks that fit my take on Benjamin Graham's conservative criteria for defensive investors. (Graham, the father of value investing, outlined his rules for defensive investors in his excellent book The Intelligent Investor.) I've had very good results with all three of these double-A stocks and their returns in recent years have been outrageously good. M.D.C. Holdings is a home builder with developments throughout the U.S. It also provides mortgages to its customers. The company has been on a roll thanks to low mortgage rates and a red-hot housing market. However, the U.S. Federal Reserve has been raising interest rates for more than a year and investors fear the housing market may collapse if higher mortgage rates force highly leveraged homeowners to sell. The spectre of a housing bust has depressed M.D.C.'s share price and its stock is trading at only 6.9 times earnings, despite earnings per share that have grown from 42 cents in 1995 to $9.91 last year. Contrarians may want to bet on M.D.C. in hopes that housing prices will level off or only drop slightly. However, it takes more than a little chutzpah to ignore the possibility that the housing bubble will burst. Standard Pacific is another home builder and is only slightly smaller than M.D.C. Holdings. Just as with M.D.C., nervousness about the housing market has boxed in Standard's price. Its price-to-earnings ratio is even lower than M.D.C.'s at 6.3 despite phenomenal sales growth that has propelled its revenue from $387 million in 1995 to $3.9 billion last year. The catch? Once again, investors have to hope that Standard's already low price fully reflects an eventual housing bust. Seaboard is a diversified agricultural and transportation company, which Homer Simpson would be proud to own. In addition to cargo shipping and commodity trading, Seaboard produces and processes succulent pork products.The only downside is that Homer couldn't afford the stock because it would take a freighter full of cash to buy a single share — which costs an artery-clogging $1,404. Yes, that's a comma in the share price. Much like Warren Buffett's Berkshire Hathaway, Seaboard doesn't care for share splits but it does believe in performance, because Seaboard's shares have managed to handily beat Berkshire over the last 10 years. Despite its recent share price gains, Seaboard has little debt and trades at a low price-to-earnings ratio of 7.4. When you're considering our double-A stocks, remember that screens have their limitations. Check to make sure that the company's situation hasn't suddenly changed in some important way before investing. Read the firm's latest press releases and regulatory filings, and scan newspaper stories to make sure that you're up to speed on all of the most recent developments. Has anything changed that might make the company's past successes a less meaningful guide to its future prospects? Similarly, screens just can't take into account every company's unique situation and it is important to consider the character of each firm before pulling out your wallet. We hope that we've intrigued you with our double-A picks but don't stop here. You can discover many more highly ranked value and growth stocks by downloading our free Excel spreadshet. Grab facts, figures, and grades on each of the Top 1,000 stocks in the U.S. and take advantage of the treasure trove of information we provide online. From the December/January 2006 issue. |
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| Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, financial advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More... | |||||
