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The Top 500 U.S. Stocks for 2010

Hints of economic recovery are in the air and the U.S. stock market is starting to sparkle. It's true that a host of worries remain, but that hasn't stopped investors from looking beyond the economy's current troubles to the return to normalcy. As a result, stocks are up smartly from their lows.

Even better, our highest ranked stocks from last year provided handsome returns. These high-grade U.S. stocks gained 24.1%, not including dividends. That's much better than the S&P 500 (SPY) which only climbed 4.2% over the same period. Despite the positive news, the U.S. stock market remains below its peak in 2007. But it seems like only a matter of time before new highs are reached.

In an effort to speed the recovery, we're pleased to present our Top 500 ranking of U.S. stocks. Just as with our Top 200 Canadian stocks on page TK, we focus on each stock's fundamentals in our crusade to uncover the very best investments.

We start by selecting the 500 largest public companies in the U.S. based on revenues. We then look for stocks with momentum by rating each stock for its growth appeal. The biggest movers get an A. The next best group gets a B and so on, all the way down to F for the stocks stuck in a funk. We also grade each stock based on its bargain appeal as a value stock. The best bargains are given As and the worst 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 quite unusual. Only five stocks were awarded a double-A this year, although 21 others managed to score at least one A and one B. We think both groups are well worth your consideration.

As always, you should view the Top 500 as a starting point for your own research. Carefully investigate each stock before diving in and use your own sound judgement before buying any stock. To help you zero in on the best investments, we've included a wealth of data in our tables. In fact, our Top 500 U.S. Stock table is so big that we had to put it on our website (below).

To give you a taste of the bargains on offer this year, let's consider the 26 stocks that earned at least one A and one B for their value and growth appeal. We've listed these elite candidates in Recovery Recommendations.

Stocks have to pass a series of strenuous requirements to make our list of top bargains. On the value front, we want our top selections to sell at modest price-to-book-value ratios and be unencumbered by heavy debt loads. They also have to be both profitable and pay dividends. On the growth side, we look for nice increases in sales and earnings per-share. In addition, we like strong returns on equity, healthy market performance, and low to moderate price-to-sales ratios. (Stocks may slip by with a B if they're found lacking on one of these points.) But keep in mind, these stocks can be controversial. After all, strong growth is rarely to be had at rock-bottom prices without some risk.

We're pleased to see eight of last year's highly ranked stocks return to the list this year. The returnees are AT&T (T), Bunge (BG), Comcast (CMCSA), Conagra Foods (CAG), CVS Caremark (CVS), L-3 Communications (LLL), and MeadWestvaco (MWV). Even though most of these stocks aren't quite the bargains they were last year, they're still good values. Some are still trading at prices they first saw many years ago. For instance, AT&T is cheaper than it was in 1995 and Comcast can be purchased for less than its 1993 price.

Let's take a closer look at the five stocks that picked up both an A for value and an A for growth this year.

Airgas (ARG) of Radnor Pennsylvania is the largest distributor of industrial, medical, and specialty gases in the United States. The firm's recent quarterly earnings slipped a bit from last year but they're up over the last two years. That's a fine record for a firm selling a bit of blue sky in a recession.

Assurant (AIZ) offers health, homeowners, and other speciality insurance to its clients. It's been a rough period for insurers but Assurant has grown its book value over the last few years and trades at only 72% of book value which makes it a bargain.

CVS Caremark (CVS) is a diversified pharmacy firm with a slew of drug stores across the United States. This sprawling empire is headquartered in Woonsocket Rhode Island and sports a nice growth rate even if its stock hasn't kept pace.

You probably know J. M. Smucker (SJM) for its jams but the diversified food firm owns a slew of other brands including Folgers, Dunkin' Donuts, Jif, Crisco, and Pillsbury. Even better, the company has been serving up a stream of regular dividend increased from its One Strawberry Lane, Orrville, Ohio headquarters.

Transatlantic Holdings (TRH) is a global property and casualty reinsurance company that operates out of New York. Think of it as an insurance company for insurers. Its growth record is modest, but, in the current economic slump, any growth is a good thing. Investors should be cautioned that while Transatlantic has been profitable in each of the last 10 years, its earnings record is lumpy. So, you might not get a smooth ride from this one.

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. We hope we've helped you on your way to a profitable future but only take the plunge after you've done your homework.

First published in the December/January 2010 edition of MoneySense magazine.

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