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The Top 500 U.S. Stocks for 2007
Southern Stars

If you're intrigued by the results of our Top 200 listing of Canada's largest stocks, you may be interested in extending your search for good investments beyond Canada's borders. If so, we invite you to join us as we embark on a road trip through the largest 500 stocks in the U.S. Our goal? To find tomorrow's stars today.

Our search for these stars is guided by exactly the same methodology that we employ with Canadian stocks. We begin by evaluating each U.S. contender for its value and growth prospects. We then assign each stock a pair of letter grades - one for its value appeal, another for its growth potential. Top-ranked stocks in each category earn an A. Bottom-ranked ones scuttle home with an F.

As regular readers will recall, this is our second trip to Wall Street and we admit to running into a little trouble on last year's excursion. In 2005, we found only seven U.S. stocks that we considered worthy of A's on both our value and growth scales. Unfortunately, two of them were involved in the housing industry. Our picks started out well enough - then got smacked by the collapsing real estate bubble in the U.S.

In our defence, we warned last year that buying housing stocks "takes more than a little chutzpah" and we cautioned that the housing bubble could bust. Thankfully, we also selected Phelps Dodge, the huge copper miner, which rewarded our faith by soaring 62.7%. Unfortunately, even that huge gain wasn't enough to drag our portfolio as a whole into profitable territory. Our seven double-A stocks have sunk an average of 4.6% since last year. (Those keeping score at home should note that the 4.6% loss doesn't include dividends, which would have substantially cushioned our loss. If you exclude our ill-fated pair of housing picks, the remainder of our U.S. portfolio managed a decent but not great 6.9% gain, or roughly 10% with dividends.)

We see last year's lackluster results as a useful reminder that there are no sure winners in the stock market - at least not over the short haul. We hope to do better this year, but you should view our Top 500 U.S. Stocks screen as merely a starting point for your own research. You can use the wealth of data in our tables to help you zero in on the stocks that are right for you.

Given the wealth of attractive stocks in the U.S. we will focus here on the very best - the handful of stocks that score a double A, earning top marks both for value and growth appeal. Just five stocks in the U.S. managed the feat this year and we've listed them below.

Each of the Fabulous Five display several extraordinary qualities. On the value front, they sell for modest price-to-earnings ratios, as well as relatively low price-to-sales and price-to-book-value ratios. In addition, each of these stocks pays a dividend and has relatively little debt compared to industry norms. All of those indicators suggest they're reasonably priced.

But that's just for starters. On the growth side, each of the Fabulous Five also demonstrate strong growth over the past five years in revenue and earnings per share, while also generating healthy returns on equity and showing a good dose of upward momentum over the past year.

Only 1% of the Top 500 stocks in the U.S. managed to meet all of our strict criteria for both value and growth. Keep in mind that these stocks are controversial. After all, strong growth is rarely to be had at rock-bottom prices without risk. So, before buying, do your own research and arrive at your own conclusions. Here's a quick scouting report on each stock to get you started (all figures in U.S. dollars):

Archer Daniels Midland (NYSE:ADM) is one of the world's biggest agricultural processors. Its net sales have shot up by an average of 28% annually over the past five years and much more growth may be in store if the company's plans to become a major force in ethanol production work out. Ethanol is a gasoline substitute and additive that's produced from crops such as maize, sugarcane and beets. It's an environmentalist's dream and one that's becoming increasingly popular because of high oil prices and concerns about dwindling supplies of petroleum. But even if you're not so keen on green fuel, Archer is still an interesting company. It trades at only 12.6 times its estimated earnings for the year ahead. Even better, the company pays a 1.1% dividend yield, which is the type of green we like the most.

Parker Hannifin (NYSE:PH) is the only industrial company to make it into this year's double-A list. But don't let visions of stodgy smokestacks deter you. Parker's stock powered 32% higher last year thanks to the success of its motion-control and fluid-power systems. The company has raked in profits in each of the last 10 years and, if all goes according to plan, the company should do even better next year. You can pick it up for only 14 times this past year's earnings and enjoy its 1.3% dividend yield as a side dish.

Liz Claiborne (NYSE:LIZ) produces and distributes apparel, accessories and fragrances under the Liz Claiborne name. Net sales have shot up an average of 11.5% annually over the past five years, while earnings per share have grown 9.3% a year over the same period. Thanks to its strong brand name, Liz Claiborne has generated 15%-plus returns on equity in each of the last 10 years. Just think: you can now buy yourself a cozy sweater for Christmas knowing that you'll help your portfolio at the same time.

Universal Health Services (NYSE:UHS) runs a string of hospitals and health-care centres. Its own financial returns have certainly been healthy enough, with a return on equity of 19.9% and impressive 22.8% net sales growth rate over the last five years. But we should warn you that next year's earnings are expected to be a bit sickly. Still, the long-term outlook looks solid and earnings are expected to grow nearly 13% a year over the next five years.

Old Republic International (NYSE:ORI) proudly displays a long-term performance record in its annual report. It shows that Old Republic's stock has provided average annual total returns of 20.7% over the past 38 years, compared to only 11.8% for the S&P 500.

How did Old Republic thump the market by such an extent? It sells insurance. Commercial property and liability insurance provides nearly half of its revenue, followed by title insurance, then specialized insurance that guarantees high-risk mortgages. The last two businesses don't strike us as particularly good places to be should all hell break loose in the housing market. But management appears to be reasonably conservative and a lot of bad news is already priced into the stock, which trades at a modest 1.2 times book value and 10.3 times earnings. If you think that U.S. real estate will muddle through, you may want to place a long-term bet on Old Republic, which should reward you with a hefty 2.7% dividend yield while you wait.

When you're considering our double-A stocks, remember that stock screens have their limitations. Check before you invest to make sure that the company's situation hasn't suddenly changed in some important way. 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.

Don't stop with our double-A picks. We think that many of the stocks on our table with slightly lower rankings are equally interesting.

From the December/January 2007 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...