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The Top 500 U.S. Stocks for 2011

The U.S. is still recovering from a nasty economic hangover but the markets are springing back to life. While a plethora of worries remain, the economy is slowly making progress and it's only a matter of time before the stock markets push past their former highs.

We've certainly seen good gains from our U.S. All-Star team which provided handsome returns once again this year. Just like the Canadian team, the U.S. All-Stars combine the best value and growth attributes. It's a one-two punch that helped them advance 19.4% since last year, not including dividends. Meanwhile the S&P 500 (SPY) trailed the All-Stars by 6.5 percentage points but managed a gain of 12.9% over the same period.

To help you navigate the tricky markets south of the border, we're pleased to present the MoneySense Top 500 ranking of U.S. stocks. Just like our Top 200 Canadian stocks on page TK, we focus on each stock's fundamentals in an effort to draft the very best competitors.

We start with the biggest bruisers and focus in on the 500 largest public companies in the U.S. based on revenues. We then look for hard hitting stocks by rating each for its growth appeal. The fastest get an A while the next best get a B and so on, all the way down to an F for the stocks stuck in a rut. We also grade each stock based on its bargain appeal as a value stock. After all, we want the best team we can get for the money. The top bargains are given As while expensive dandies 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 four stocks were awarded a double-A this year, while 14 others managed to score at least one A and one B. Both groups are well worth your consideration.

As always, you should view the Top 500 as a good place to start your own research. Carefully investigate each stock before diving in and use your own sound judgement before buying. To help you recruit the best, we've included a wealth of data in our tables. In fact, the Top 500 U.S. Stock table is so gigantic that we had to put it online.

But, before you head to the web, we highlight the very best stocks here. All 18 stocks that earned at least one A and one B for their value and growth appeal are shown in American All-Star Scorecard.

To get to the front of the pack each stock must pass a series of strenuous tests. 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 profitable and pay dividends. On the growth side, we look for solid 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. (A stock may eke by with a B if they're found wanting on one of these criteria.) But keep in mind, high performance stocks aren't without risk and they can, and occasionally do, disappoint.

After testing all of the candidates, we were happy to see seven of last year's All-Stars make the cut again this year. The veterans are AT&T (T), Bunge (BG), Comcast (CMCSA), CVS Caremark (CVS), Del Monte Foods (DLM), J.M. Smucker (SJM), and L-3 Communications (LLL). Indeed, AT&T, Bunge, Comcast, CVS Caremark, and L-3 Communications have now passed the test for the third year in a row.

Let's take a closer look at the four stocks that picked up a coveted A for value and an A for growth. As it happens, communications companies were big winners this year.

AT&T (T), the well-known telecommunications company, has been stuck in a rut. Indeed, it is currently trading for less than it did way back in 1995. However, that comparison doesn't include dividends which matter quite a bit because the stock yields 5.9%. Even better, AT&T has a nice habit of regularly boosting its dividend and, based on current earnings, there is ample room for future dividend growth.

Centurylink (CTL) is the fourth largest local-exchange telephone company in the United States and has significant rural operations. But it's getting even bigger by merging with Qwest Communications (Q) which has been on the ropes for much of the last decade. The merger gives us pause for concern because mergers have a tendency to go wrong. But, hopefully, Centurylink will avoid this fate and manage to maintain its sumptuous 7.2% dividend yield.

Comcast (CMCSA) is the country's largest cable firm and it skated through the recession with flying colours. The company even initiated a dividend in 2008 which was increased this year. But investors are likely to be more attracted to its strong earnings growth which analysts expect to continue at a 10%+ annual clip over the next five years. Comcast is also moving to acquire NBC Universal from General Electric (GE) which we hope will prove profitable.

Last but not least, PNC Financial (PNC) is a large bank with operations in 15 states. It also comes with significant wealth management operations and a big stake in publicly-traded BlackRock (BLK). PNC has weathered the downturn in reasonably good shape and even managed to repay TARP funds earlier this year. While abundant risks remain, if the economy recovers, PNC could be a real winner for investors. But this happy result may well take a few years to come to pass.

As always, remember that stock screens have their limitations. Make sure that a company's situation hasn't suddenly changed in some important way before you invest. Read the 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 put you on track to a profitable future but only take the plunge after you've done your homework.

First published in the December/January 2011 edition of MoneySense magazine.

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