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The Top 500 U.S. Stocks for 2009

Warren Buffett famously warned, "unless you can watch your stock holdings decline by 50% without becoming panic-stricken, you should not be in the stock market." Well, U.S. stocks are down nearly 50% in one of the worst bear markets ever. It's hard not to be a little panicky.

But take a deep breath because there is reason to hope. History is now on the stock buyer's side. There hasn't been a single ten-year period following a big bear market that hasn't been profitable for U.S. stock investors. Yes, that includes the 1929 crash. Even better, Buffett himself recently traded all the cash in his personal account for stocks. You don't get a better bullish indicator than that.

Bargain shopping is the order of the day and, to help out, we're pleased to present our Top 500 ranking of U.S. stocks. Just as with our Top 200 Canadian stocks, we focus on each stock's fundamentals in our quest to uncover the very best investments.

We start by selecting the 500 largest public companies in the U.S. based upon net sales. We then look for bargains by rating each stock for its value appeal. The most undervalued stocks get an A. The next most undervalued group gets a B and so on, all the way down to F for the stocks that we deem to be overvalued. We also grade each stock based on its prospects for growth. Stocks with the best growth drivers are given As; the slow growers are sent home with Fs.

Ideally a stock will get a double-A rating, making it both an outstanding growth and value candidate, but that's rare. Only three stocks picked up a double-A this year, although 19 others managed to nab at least one A and one B.

Should you load up on these high-grade stocks? Only if you can truly follow Buffett's advice. Even our conservatively selected stocks weren't spared from the market crash. Taken as a group, our highest ranked stocks from last year lost 39.6%. That's a painful result. As we and other stock market investors discovered, there just weren't many places to hide - over half of the largest 500 U.S. stocks declined more than 38% during the last 12 months. More than 3 in 10 suffered falls in excess of 50%. Even worse, these figures do not include the sizeable number of stocks that were dumped into the dustbin of history. So far 2008 is shaping up to be one of the worst years ever for stocks. This collapse will hopefully prove to be a once-in-a-lifetime event.

As tough as the last year has been, remember that there is a silver lining in the grim statistics. Stocks are now far less expensive than they once were. Today's low prices should substantially boost your long-term returns. It makes much more sense to be bullish when market sentiment is grim than when the outlook is rosy. We firmly believe it is good policy to buy when others are fearful.

As always, you should view the Top 500 as a starting point for your own research. Carefully consider each stock before diving in and use your own judgement to choose what is best for your portfolio. Even if you decide not to use our grades to guide your stock picking, you'll find a wealth of data in our tables that can help you zero in on investments that are right for you. In fact, our Top 500 U.S. Stock table contains so much information that we had to put it on our website (at the end of this page).

To get a taste of this year's bargains, consider the roster of 22 stocks that earned at least one A and one B for their value and growth appeal. We've listed these elite candidates in Bargains for Bad Times, above.

Some extraordinary qualities are needed to make our list of bargains. On the value front, all of our top selections are profitable and pay dividends. They sell at modest price-to-book-value ratios, and have little debt. On the growth side, they demonstrate strong increases in sales and earnings per-share. In addition, they generate healthy returns on equity, have achieved better than average market performance, and are not expensive on a price-to-sales basis. But keep in mind, these stocks are controversial. After all, strong growth is rarely to be had at rock-bottom prices without some risk.

Only one highly rated stock from last year got the nod again. CVS Caremark (CVS) operates a chain of drug stores and was a strong performer.

Remarkably, many of our new stocks are trading at prices from decades past. AT&T (T), the giant phone company and member of the prestigious Dow Jones Industrial Average, is cheaper than it was in 1996. Specialty metals producer Allegheny Technologies (ATI), is changing hands below its 1990 highs. ConAgra Foods (CAG) sells below its 1991 price. Even Comcast (CMCSA) can be purchased at a discount to its 1993 price.

We could go on because other stocks are suffering from a similar back-to-the-future phenomenon. Because of it, investors now have a rare, perhaps once-in-a-generation, opportunity to buy excellent companies at low prices. The median Top 500 stock is selling for 61% of its sales and below 11 times earnings.

The current panic will pass. It might take a while, perhaps even several years. But the market will make a comeback and stocks bought at today's prices should provide handsome returns.

As always, remember that stock screens have their limitations. Check to make sure that a company's situation hasn't suddenly changed in some important way before you invest. Read the firm's latest press releases, regulatory filings, and scan newspaper stories to make sure that you're up to speed on all of the most recent developments. Then screw up your courage and consider buying a few bargains.

From the December/January 2009 issue

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