The 12th annual MoneySense U.S. All-Star Stocks guides investors to the best U.S. equities on offer. It compiles a buffet of facts and figures on the 500 largest stocks in the U.S. and boils everything down into easy-to-use letter grades. As with their Canadian counterparts, the stocks with the most growth potential and value appeal are promoted to the All-Star team.
The U.S. All-Stars have steamed ahead since the crash of 2008. They jumped by 326%, or 15.9% per year, on average, over the last eight years while the market (as represented by SPY, the SPDR S&P 500 exchange traded fund) gained 213%, or only 9.9% annually, over the same period. Over the last five years the U.S. All-Stars advanced by an average of 16.2% per year and beat the market, which grew by 12.0% per year.
Timing can mean a lot when you’re investing. Unfortunately, the All-Stars had a difficult period leading into the 2008 crash and they’ve been making up ground since then, which has weighed on our cumulative returns since inception. So, 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 70%, or an average of just 4.9% per year over the last 11 years. By way of comparison, the market gained 77%, or 5.4% per year.
In more bad news, last year’s results weren’t stellar. The All-Star Stocks fell by an average of 0.4% since the last time and trailed the market, which gained 7.2%. But we hope they’ll do better next year. (Remember, the U.S. returns mentioned above do not include dividends and are presented in U.S. dollar terms.)
Our experience illustrates the perils of investing in a strategy just before it hits a rough patch. Nonetheless, we do think the method is worth sticking to over the long term and we’re encouraged by its market-beating performance after the market’s largest downturn since 1929. Since the 2008 crash the All-Stars team has only lagged its benchmark twice. It topped it by double digits in three other years over that same span.
Like its Canadian counterpart, we select our U.S. All-Stars by focusing 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, assigning each a letter grade, like the ones you received in school. 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 All-Stars. 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 extra points to profitable dividend payers and avoid companies with high debt loads compared to their peers because they have a habit of spoiling.
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 three stocks got the double-A prize.
But we think all of the All-Stars 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. This year’s All-Star team is larger than usual and contains 28 firms.
You’ll find all of the key data points for the U.S. All-Stars and can scrutinize the grades and their underlying data for yourself in the full 500 stocks chart.
Digging a deep hole in 2008
The U.S. All-Star Stocks have slightly underperformed the S&P 500 since inception. If you were lucky enough to have waited until 2008 to use this strategy, you would have outperformed handily.