The Top 500 U.S. Stocks for 2015
It's not wise to judge a book by its cover, which is unfortunate finding a good book is tricky at the best of times. Unless, of course, it's one you've already enjoyed. Searching the library shelves for a new work to read on a lazy Sunday afternoon can - almost - take the fun out of it. Investors face a similar dilemma when it comes to picking which stocks to put in their portfolios. There are thousands and thousands of stocks to chose from in the U.S. and they represent a vast array of different businesses. It can all be a little overwhelming.
That's why we created the MoneySense Top 500 guide to U.S. stocks nine years ago. It highlights the best stocks America has to offer and contains a plethora of facts and figures on each one.
Just as we do for the Top 200 Canadian stocks, each U.S. stock is sized up for its appeal as a value investment and as a growth investment. Those that score well on both make it into our Top 500 All-Star team.
The U.S. All-Stars have performed very well since the stock market collapse in 2008. If you had purchased equal dollar amounts of them six years ago and rolled your portfolio into the new list of All-Stars each year, you'd have gained 22.9% per year on average. The market also fared well over the same period with the S&P 500 (as represented by the SPY ETF) advancing 13.6% per year.
Unfortunately, the All-Stars lagged a bit this year. While they gained 8.0% since last time, they trailed the S&P 500 (SPY), which advanced 9.7%.
We should add that the Top 500's long-term results aren't as rosy as those generated by the Top 200. The All-Stars had a difficult time during their first three years and they got clobbered by the crash in 2008. While the gains since then have been good, the All-Star stocks only climbed 4.3% per year on average over the past nine years, trailing the S&P500 (SPY), which advanced 5.2% annually over the same period. (The returns mentioned above are presented in U.S. dollar terms and do not include dividends.)
Our experience illustrates the perils of investing in a strategy just before it starts to splutter. Nonetheless, we think the method is worth sticking with over the long term and we're encouraged by its market-beating performance over the last six years.
In the Top 500 we evaluate the largest 500 stocks in the U.S. (by revenue) using data from Bloomberg. Each stock is examined first for its value potential and then for its growth appeal. Those with the best characteristics are awarded As, solid candidates get Bs or Cs. Stocks in need of improvement walk away with Ds or Fs.
To get top marks each stock must pass a series of strict tests that are identical to those used in the Canadian Top 200, which are detailed on page 34.
On the value front we seek stocks selling at modest price-to-book-value ratios compared to their peers and the markets overall. We give extra points to profitable dividend payers and avoid companies with high debt loads compared to their peers.
On the growth side of the ledger, we favour firms that have increased their sales-per-share and earnings-per-share. We also prefer companies with strong returns on equity, healthy market performance over the last year, and low-to-moderate price-to-sales ratios.
The most elite group of stocks get As on both measures, making them outstanding growth and value candidates. Usually only a few make the grade each year and this time around just two stocks managed to nab the double-A prize.
But we think firms that manage to get at least one A and one B on the value and growth tests are also worthy of your attention. Such stocks are eligible to join our All-Star team, and this year 29 made it.
Because we cram so much data into the Top 500 table, it's too big to fit in the magazine. Instead, we put it online (at the bottom of the page). But before rushing to your computer, you'll find the very best prospects right here.
We congratulate PulteGroup and Valero Energy for taking home the double-A prize this year. As it happens, Valero was also highly ranked last year.
PulteGroup (PHM) is a large home builder that operates in about 50 major metropolitan markets and calls Atlanta its home. The firm is still recovering from the 2008 downturn, which hit the U.S. real estate and financial markets hard. Despite the slow recovery, PulteGroup returned to profiability in 2012, started paying dividends again in 2013, and appears to be on the road to better times.
Valero Energy (VLO) owns 15 petroleum refineries and sells transportation fuels in more than 7,400 retail outlets. It operates in the U.S. and the U.K., and many Canadians will recognize its Ultramar stations. The firm has an excellent long-term growth record but it ran into a rough patch in 2008. Since then it has returned to profitability and pays a higher dividend than it did before the crash.
The All-Star team
The double-A stocks are joined by 25 firms that earned at least one A and one B to form this year's All-Star team. Not counting the double-A stocks, eight got top marks for value and the other 19 are top growth candidates.
The value side of the All-Star list contains AGCO (AGCO), Ameren (AEE), Archer-Daniels-Midland (ADM), Goldman Sachs (GS), National Oilwell Varco (NOV), Old Republic International (ORI), Rock-Tenn (RKT) and WellPoint (WLP). AGCO makes agricultural machinery that it sells worldwide. Ameren is a large electric and gas utility based in St. Louis. Archer-Daniels-Midland is one of the world's largest agricultural processors. Goldman Sachs is a giant investment bank that was bailed out by Warren Buffett in 2008. National Oilwell Varco provides equipment and services to oil and gas drillers both on land and offshore. Old Republic International is a property and casualty insurance company that saw its mortgage guarantee business go down in flames in the financial crisis. (I own a few of its shares.) Rock-Tenn makes corrugated and consumer packaging and operates in the U.S., Canada, Mexico, Chile, Argentina and China. Last but not least, WellPoint is in the managed health-care business.
The growth side of the All-Star list is packed this year. Airlines are quite popular with Alaska Air (ALK), JetBlue Airways (JBLU), and Southwest Airlines (LUV) all making it to the top of the class. They are joined by Northrop Grumman (NOC), which is a large aerospace defence contractor. Six insurance companies also made the grade including Allstate (ALL), American Financial Group (AFG), Assurant (AIZ), Hanover Insurance Group (THG), Lincoln National (LNC) and Travelers (TRV). (I happen to own Allstate myself.) DR Horton (DHI) is another All-Star home builder, and Lowe's (LOW) is a big home improvement retailer. Cinephiles can save their movies on Western Digital's (WDC) hard drives or get them delivered via FedEx (FDX). But they'd be wise to step away from the TV occasionally to refill their prescriptions at CVS Health (CVS) or shop at Dillard's (DDS) department stores. Moving into the land of business services, Quanta Services (PWR) provides contracting services to the power and oil and gas industries. Core-Mark (CORE), a food wholesaler, and Jones Lang LaSalle (JLL), a property manager, round out the growth-oriented All-Star roster.
Before buying any stock on this year's list, it's important to know that they all come with some risk. While we believe our top stocks have what it takes to succeed, the future is far from certain and some of them will inevitably disappoint. There will also be periods - like the crash of 2008 - when stocks generally do poorly.
Stock screens have their limitations. Make sure that a company's situation hasn't changed in some important way before investing. Read the latest press releases and regulat lings. Scan newspaper stories and get up to speed on all of the most recent developments. As always, we endeavour to table path, but it's wise to do your homework before you set out.
+ Download the Top 500 (.xls file)
First published in the December/January 2014 edition of MoneySense magazine.
|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...|