To make it as easy as possible for you to pick the best U.S. buys, we’re happy to once again present our Top 500 ranking of U.S. stocks. The Top 500 uses the same objective measures of financial virtue as our Top 200 listing of Canadian stocks to uncover potential stars.
Screening for growth and value
We start our shopping expedition south of the border by selecting the 500 largest public companies in the U.S. based on their net sales. We then evaluate each stock for its growth prospects and assign it a letter grade. The fastest growing stocks are awarded an A. The next group gets a B and so on, all the way down to F.
We don’t stop there, though. Next we consider a stock’s appeal as a value investment and we assign it a grade on that scale as well — the best bargains win an A, the most expensive stocks get stamped with an F.
The ideal, of course, is for a stock to get a double-A rating, marking it as both an outstanding growth and a value prospect, but that’s rare. Only a single stock managed that feat this year, although 11 others managed to nab at least one A and a B.
Do your own research
Should you load up on these highest graded stocks? We wish we could say yes, but the reality is that our system of evaluating stocks has had some huge hits and some big misses. Last year 2007, we found five stocks that earned A’s on both our value and growth screens. Our best performer was Parker Hannifin, a manufacturing firm that split its stock and rewarded us with a 43% gain. Unfortunately, two of our picks disappointed. Liz Claiborne, the clothing manufacturer, fell 35%, while Old Republic, an insurance firm, posted a 33% loss. Taken as a group, our five double-A stocks lost 7%, not including dividends.
The losses show the importance of applying your own judgment to the results from the Top 500 U.S. stocks — or, for that matter, from any stock screen. We recommend that you view the Top 500 as a starting point for your own research. We’re confident that even if you don’t decide to follow our methodology, you’ll find that our tables contain a wealth of data about each stock that can help you zero in on the investments that are right for you.
The top stocks
To get a taste of what is available, consider the handful of stocks that earned at least one A and one B for their value and growth appeal. We've listed them under The Dandy dozen: Our top U.S. stock picks.
Some extraordinary qualities are needed to make our list of top stocks. On the value front, all our chosen stocks pay a dividend and sell for modest price-to-sales and price-to-book-value ratios. On the growth side, they demonstrate strong increases in sales per share and earnings per share. In addition, most generate healthy returns on equity, carry relatively little debt, and enjoy rising share prices. Keep in mind, though, that these stocks are controversial. After all, strong growth is rarely to be had at rock-bottom prices without some risk.
