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The Top 500 U.S. Stocks for 2014

Many Canadians cross the border to indulge in a little shopping. Bargain hunters are lured by low prices while others seek a wider selection of goods. But shoppers shouldn't be the only ones beating a path to the border. Investors should also think of taking a trip to the U.S. stock market.

To help find the best stocks on offer we're pleased to present this year's MoneySense Top 500 guide to U.S. stocks. Like the Canadian Top 200, we grade the largest U.S. stocks for their appeal as value and growth investments. Those at the top of the class make it into our All-Star team.

Last year's All-Star stocks turned out to be great buys, gaining an average 38.7%. In comparison, the U.S. stock market, represented by the S&P 500 (SPY), climbed only 23.3% since last time. The U.S. All-Stars beat the market by 15.4 percentage points, not including dividends.

To find the best prospects we use the same numbers-based methodology as in the Top 200. In brief, we start with the 500 largest public companies in the U.S. based on revenues, using Bloomberg data. Each stock is sized up for its growth potential. Stocks with the best records are awarded As, the next best get Bs, and so on, down to Fs for those in need of improvement. Then we grade each stock based on its appeal as a value investment. The best bargains get As while pricey firms that trade at sky-high prices take home Fs. To get top marks each stock must pass a series of strict tests. For growth, we favour firms that are increasing sales and earnings per share at a good clip. We like strong returns on equity, healthy market performance over the last year, and low-to-moderate price-to-sales ratios. For value, we seek stocks selling at modest price-to-book-value ratios compared to peers and markets overall. We view high debt loads negatively and give extra points to profitable firms paying dividends. To get to the top of the class, and into the All-Star team, stocks must possess all these qualities but may squeak by with one B if found slightly wanting.

Top prospects get a coveted double-A rating, making them outstanding growth and value candidates. Only a few get the award each year. This time, four stocks won the double-A prize, but 24 others scored at least an A and a B. Both groups are worth considering.

Remember that all stocks have risks. While we believe our top stocks have what it takes to succeed, the future is far from certain and some of them will disappoint. Alas, there are no guarantees when it comes to the market.

All-Star Team

The data on all Top 500 Stocks is too big to fit in the magazine. (You can download it via the link at the bottom of the page.) But before rushing to the site, you can learn about the best prospects right here.

Congratulations go to the four stocks that took home double-As. Those that earned an A for their growth prospects and an A for their value appeal were: HollyFrontier, Humana, Reliance Steel, and Valero Energy.

HollyFrontier (HFC) of Dallas, Texas owns five petroleum refineries and has grown rapidly over the last decade. Income investors will note it has more than tripled its dividend since 2008. In addition, its stock trades at a below average price-to-earnings ratio of 5.8, which gives it upside potential.

Valero Energy (VLO) owns 16 petroleum refineries and sells transportation fuels in more than 7,300 retail outlets. It operates in the United States, the U.K., and many Canadians will recognize its Ultramar stations. The firm has an excellent long-term growth record but ran into a rough patch in 2008. It has rebounded, but the downturn represents an important reminder that many companies grow in an uneven fashion.

Reliance Steel (RS) boasts of being the largest metals service centre company in North America. It has more than 290 locations scattered across the globe, where it provides metals processing and distribution services. The Los Angeles-based firm has smartly grown its sales, earnings, book value and dividends over the last decade.

Humana (HUM) is headquartered in Louisville, Kentucky and provides health insurance and related services. It has grown dramatically over the last decade, with its book value per share moving from just under $12 in 2003 to almost $60 today. Although the U.S. health-care system is undergoing some significant changes, that hasn't stopped its stock from advancing 24% over the last 12 months. But don't stop at the double-A companies. The 24 American All-Star stocks with one A and one B are worth checking out.

Sector Diversification

For more diversification, we highlight the best stocks in each sector. Wise investors spread investments around geographically and buy stocks from multiple industry groups. It may not be a surefire hedge against market crashes but can cushion the blow when a particular sector runs into trouble.

In addition, Canadian investors know all too well that it can be hard to build a well diversified portfolio without going outside the country. The problem is our market is overly concentrated in financial and resource stocks such as banks, oil companies and mining concerns. Canada just doesn't offer a broad selection of large health-care and technology stocks.

That's why we highlight good U.S. stocks in the five sectors poorly represented in Canada: communications, consumer cyclicals, consumer non-cyclicals, industrials and technology. But top grades weren't the only consideration. We also made sure each stock came from a different industry subgroup.

You'll notice familiar names like Microsoft, Lowe's, Safeway and Xerox. But less famous names, like Seaboard (SEB), are also worth investigating. Seaboard is a food and trading conglomerate headquartered in Shawnee Mission, Kansas. Last year most of its income came from its thriving pork business. But its sugar, trading and power divisions were also profitable. In addition, you may have devoured its turkeys because the company owns 50% of Butterball.

If your portfolio is crammed full of Canadian stocks, think about adding a few U.S. stocks to round out your holdings.

Remember that stock screens have their limitations. Make sure a company's situation hasn't suddenly changed in some important way before you invest. Read the latest press releases and regulatory filings, and scan newspaper stories to get up to speed on all of the most recent developments. As always, we endeavour to put you on the path to a profitable future, but head out only after you've done your homework.

First published in the December/January 2013 edition of MoneySense magazine.

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