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The Top 500 U.S. Stocks for 2016

The first gust of arctic air inspires many Canadians to dream of tropical vacations. Perhaps a nice cruise to the Caribbean or a sail along the coast of Italy. The possibilities are nearly endless - at least until rude practicalities enter into the picture. Similarly, investors face a daunting number of choices when searching for good stocks. Head south to Wall Street and you'll soon discover thousands and thousands on offer. It can all be a little overwhelming and not nearly as much fun as planning a vacation.

Never fear, we're here to help with the 11th annual MoneySense All-Star guide to the Top 500 U.S. stocks. In it we compile a veritable sea of facts and figures on each of the largest stocks in the U.S. and then boil everything down into an easy-to-use letter grade. Stocks with the most growth potential combined with value appeal make it onto our All-Star team.

We're very pleased to be able to say that the U.S. All-Stars have outperformed over the last decade - despite getting off to a rocky start. Indeed, they bested the market over the last one, three, five, seven and 10 years, with particularly strong relative gains more recently.

If you had purchased an equal dollar amount of the All-Stars in the first year and rolled your portfolio into the new list of All-Stars each year thereafter, you'd have gained an average of 5.5% per year over the last decade. By way of comparison, the market (as represented by the SPDR S&P 500 ETF) gained 5.2% per year.

The U.S. All-Stars had trouble getting their sea legs in the first few years, thanks in part to the 2008 stock market crash. But they've been steaming ahead ever since, shooting up by an average of 18.5% annually over the last seven years compared to the market's gain of only 10.3% per year. This upswing was even more impressive over the last five years: The All-Stars jumped by an average of 17.2% per year and beat the market, which grew at a rate of 11% per year. And what about the last three years? The All-Stars gained 20.4% annually while the market climbed 12.1%.

You'll be happy to know that this positive trend also continued last year, with the All- Stars advancing 16.6% and outpacing the market's return of 4.7% by 11.9 percentage points. (Please note that all the return figures mentioned above do not include dividends and are presented in U.S. dollar terms.)

Our experience illustrates the benefits of sticking with a sound strategy even when it encounters a rough patch. Doing so might have been stressful early on, but we were buoyed by our experience in Canada and determined to stay on course. It turns out that we were right to do so. It also highlights the unfortunate fact that stock investors are bound to suffer down periods from time to time, which is something every investor should remember.

The Grades

The Top 500 focuses on the largest 500 stocks in the U.S. (as measured by revenue) using data from Bloomberg. We start by evaluating each stock for its value potential and then for its growth appeal. Those with the best characteristics are awarded As, solid candidates get Bs or Cs, while stocks in need of improvement swim away with Ds or even Fs. Stocks with good grades are deemed to be worthy of consideration while those at the bottom of the class should be treated with caution.

To get top marks each stock must pass the same series of strict tests that we use for the Canadian Top 200, which are detailed on page 31.

In brief, our growth test favours firms that have increased their sales-per-share and earnings-per-share over the last three years. We also prefer companies with strong returns on equity, healthy market performance over the last year, and low-to-moderate priceto- sales ratios.

On the value front we seek stocks selling at modest price-to-book-value ratios compared to their peers and the market overall. We also give extra points to profitable dividend payers and avoid companies with high debt loads compared to their peers because they have a habit of capsizing.

Top stocks get As on both measures, making them outstanding growth and value candidates. Only a few manage this feat each year and this time around just one stock netted a double-A prize. But we think all of the All-Star Stocks are worthy of your time and consideration. These firms managed to get at least one A and one B on the value and growth tests, and this year's All- Star team contains 19 firms.

Because we cram so much data into the Top 500 table, it is - alas - too big to fit in the magazine. That's why we put it on our website (below). But, before you set sail for the Internet, tarry awhile because we will reveal the stocks with the brightest prospects right here.

Double-A Stock

Congratulations go to PulteGroup (PHM) because it is the sole candidate to win a double-A prize this year. As it happens, the firm got the same prize last year. PulteGroup is a large home builder with operations in about 50 major metropolitan markets and calls Atlanta its home. The firm is still recovering from the aftereffects of the 2008 downturn, which hit the U.S. real estate and financial markets hard. But despite the slow recovery, PulteGroup returned to profitability in 2012, started paying dividends again in 2013, and appears to be on course for better times.

All-Star Stocks

While PulteGroup heads up this year's All-Star team, it's joined by 18 other companies that earned at least one A and one B on the value and growth tests. Seven of the 18 got top marks for value while 11 got top marks for growth. The seven leading value stocks are Avnet (AVT), Bank of New York Mellon (BK), Leucadia National (LUK), Old Republic International (ORI), SCANA (SCG), Trinity Industries (TRN), and Valero Energy (VLO). As it happens, Valero Energy and Old Republic were also highly rated last year. Valero is a past double-A winner while Old Republic took home an A for value and a B for growth last time.

Here's a quick look at each value star. Avnet is an electronics wholesaler that does business in over 90 countries. The Bank of New York Mellon is the financial giant founded by Alexander Hamilton in 1784. Leucadia National is a conglomerate with wide-ranging interests from beef to banking. Old Republic isn't related to the Star Wars franchise, but is a property and casualty insurance company. (Disclosure: I happen to own a few shares.) SCANA is an electricity and gas utility with customers in the Carolinas and Georgia. Trinity is an industrial firm that caters to the energy, transportation, chemical and construction sectors. Last up on the value side, Valero Energy is a petroleum refiner and retailer with operations in the U.S., U.K. and Canada.

The 11 leading growth stocks are Anthem (ANTM), CVS Health (CVS), Dollar General (DG), Hanover Insurance Group (THG), Jones Lang LaSalle (JLL), Packaging Corp. of America (PKG), Penske Automotive (PAG), RPM International (RPM), Southwest Airlines (LUV), Travelers (TRV) and WR Berkley (WRB). Anthem is a returning member of last year's All-Star list but back then it was called WellPoint. The other returning All-Stars are CVS Health, Hanover Insurance, Jones Lang LaSalle, Southwest Airlines and Travelers.

Anthem is a giant in the managed care business and CVS Health runs pharmacies across the land. Dollar General operates a popular discount retail chain. They're joined by three insurance companies, with the largest (by revenue) being Travelers, followed by WR Berkley and Hanover. Jones Lang LaSalle is a property manager, Packaging Corp. makes boxes of all sorts, Penske is an auto retailer, and RPM is a chemical company specializing in coatings, sealants and building materials. Last but not least, Southwest Airlines is the original discount airline.

Before rushing to buy any stock it's important to understand the risks that stock ownership entails. While we believe our top stocks have the ingredients necessary for success, the future is far from certain and some stocks will inevitably flounder. There will also be periods - like the crash of 2008 - when stocks generally do poorly. Simply put, there are no guarantees when it comes to the stock market.

That's why you should make sure that a company's situation hasn't changed in some important way before investing. Read the latest press releases and regulatory filings. Scan newspaper stories and get up to speed on all of the most recent developments. As always, we endeavour to put you on a profitable course, but head out only after you're fully prepared.

First published in the December/January 2015 edition of MoneySense magazine.

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