America’s best stocks 2015

Last year’s Top 500 All-Star stocks gained 8%, continuing a six-year recovery

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From the December 2014 issue of the magazine.

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It’s not wise to judge a book by its cover, which is unfortunate because 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.

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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.

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.

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Norm Rothery, CFA, PhD, is the founder of StingyInvestor.com and tweets as @NormanRothery. He may hold some of the securities mentioned in this article.

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