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The Top 500 U.S. Stocks for 2018

We're pleased to present the thirteenth annual MoneySense Top 500 guide to large U.S. stocks. It contains a wealth of information on the largest firms south of the border. It also condenses the investment prospects for each firm down into an easy-to-understand letter grade. The best make it into the All-Star team.

The U.S. All-Stars have been on a roll since the crash of 2008. They surged 16.6% per year, on average, over the last nine years while the market (as represented by the SPDR S&P 500 exchange traded fund) gained 10.9% annually. Over the last five years the All-Stars advanced by an average of 16.3% per year and beat the market which climbed 12.6% per year.

Unfortunately, the All-Stars suffered from a difficult period leading up to the 2008 crash. If you had purchased an equal dollar amount of the All-Stars in 2005 and rolled your portfolio into the new list of All-Stars each year thereafter, you'd have gained an average of 6.3% per year over the last twelve years. By way of comparison, the market gained 6.5% per year over the same period.

But last year's results were pretty good. The U.S. All-Star stocks gained an average of 22.2% since the last time and beat the market, which gained 19.7%. (The returns mentioned above do not include dividends and are presented in U.S. dollar terms.)

While our experience illustrates the impact that can be caused by encountering a rough patch early on, we think the U.S. All-Star strategy is worth sticking to. We've also been encouraged by its performance in recent years.

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 at the top of the class are awarded As, solid candidates get Bs or Cs. Stocks in need of improvement get Ds or Fs. Stocks with good grades are deemed to be worthy of consideration while the laggards 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. But, 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 price-to-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 points to profitable dividend payers. In an effort to avoid risky situations, we avoid companies with high debt loads compared to their peers.

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 a single stock got the double-A prize.

But we think all of the All-Stars are worthy of your time and consideration. These are the firms that got at least one A and one B on the value and growth tests. A total of 23 firms made it into All-Star team this year.

All-Stars

The U.S. All-Star team is composed of the 23 stocks that got at least one A and one B on our value and growth tests this year. We think all of them are worthy of your consideration.

All-Stars
Anthem Inc (ANTM)
Arthur J Gallagher & Co (AJG)
Bank of New York Mellon Corp/T (BK)
CalAtlantic Group Inc (CAA)
CNA Financial Corp (CNA)
Delta Air Lines Inc (DAL)
Dollar General Corp (DG)
Fifth Third Bancorp (FITB)
Foot Locker Inc (FL)
General Motors Co (GM)
Goldman Sachs Group Inc/The (GS)
Group 1 Automotive Inc (GPI)
Humana Inc (HUM)
Kelly Services Inc (KELYA)
KeyCorp (KEY)
Lincoln National Corp (LNC)
Morgan Stanley (MS)
Newell Brands Inc (NWL)
Owens Corning (OC)
PNC Financial Services Group (PNC)
Reinsurance Group of America (RGA)
Toll Brothers Inc (TOL)
Unum Group (UNM)


The Double-A Captain

Unum Group (UNM) picked up the top prize both this year and last by earning an A for value and an A for growth. The firm manages employee benefits for customers in the U.S. and the U.K. from its headquarters in Chattanooga, Tennessee. Its stock trades at 1.3 times book value after posting a total return of 46% over the last 12 months.

The All-Star Roster

The value side of the All-Star roster all sport As for value and Bs for growth. The list of 13 stocks that fit the bill starts with Kelly Services (KELYA), which was a top value contender last year. The new value players are the Bank of New York Mellon (BK), CalAtlantic Group (CAA), CNA Financial (CNA), Fifth Third Bancorp (FITB), Foot Locker (FL), General Motors (GM), Goldman Sachs (GS), Group 1 Automotive (GPI), KeyCorp (KEY), Morgan Stanley (MS), Newell Brands (NWL), and PNC Financial Services (PNC).

Kelly Services is a staffing firm and is the smallest member of the value side by both revenues and market capitalization. It sports the highest average three-year earnings-per-share growth rate at 77% and has a modest book value multiple of 0.9. Car marker General Motors is the largest of the bunch by revenue and it trades at 8 times trailing and forward earnings. Auto retailer Group 1 Automotive provides the best bargain in relation to sales because it trades at a sales multiple of just 0.13. Shoe retailer Foot Locker has the lowest earnings multiple at 7 and pays the highest dividend yield at 4.0%. Home product company Newell Brands sports the highest three-year sales-per-share growth rate on the value side at 16%. Home builder CalAtlantic provides a nice storage solution for humans while trading for less than 10 times trailing and forward earnings. Insurance can be obtained from CNA Financial whose stock shot up by 51% over the last year. But Morgan Stanley was the best performer over the last 12 months with a gain of 54%. Goldman Sachs posted good returns and happens to be the largest value firm based on its market capitalization. The value side is rounded out by four smaller banks, which all posted returns north of 30% over the last year and trade at book value multiples of 1.5 or less. They are KeyCorp, Fifth Third Bancorp, PNC Financial, and the Bank of New York Mellon.

The growth side of the All-Star list contains nine names that earned As for growth and Bs for value this year. Its three returning members are Arthur J Gallagher (AJG), Dollar General (DG), and Owens Corning (OC). The new stocks are Anthem (ANTM), Delta Air Lines (DAL), Humana (HUM), Lincoln National (LNC), Reinsurance Group of America (RGA), and Toll Brothers (TOL).

The largest growth All-Star by revenue and market capitalization is healthcare firm Anthem. It also has the best 12-month return at 59%. Humana didn't fare quite as well but it still posted a return of 41%. Delta Air Lines generated the largest three-year earnings-per-share annual growth rate at 87% while offering a low trailing earnings multiple of 11 and a forward earnings multiple of 10. Home builder Toll Brothers is the smallest firm on the growth list by revenue and market capitalization. It also sports the highest three-year sales-per-share annual growth rate at 16%. Building materials firm Owens Corning wasn't as good on this score but it has better momentum and can boast about its 55% return over the last 12 months. Insurance broker Arthur J Gallagher offers the highest dividend yield of the growth All-Stars at 2.5%. Insurance firm Lincoln National trades at book value and is the best bargain on this measure. Reinsurance Group of America is a touch more expensive with a book value of 1.2. Dollar General rounds out the growth group and offers double-digit sales and earnings growth.

Before rushing to buy any stock it is 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. Take particular care when when buying or selling stocks that trade infrequently.) As always, we try to put you on a profitable course, but head out only after you're fully prepared.



First published in MoneySense in 2017.

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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...