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The Top 500 U.S. Stocks for 2012

There are a few skills that every Canadian should pick up in childhood and skating is one of them. But no one tells you that it all slips away after spending years reading books and sipping hot chocolate by the fire. That's something I discovered the hard way when I recently squeezed my feet into a pair of skates and tottered out onto the cold hard ice of my local rink. The prospect of falling seemed far less painful when I was younger, slimmer, and closer to the ground. As a result, my first hobble around the rink was more a triumph of will than of good sense.

Just as with learning how to skate, the first leap into the world of stocks can be an uncertain one. That's why - in an effort to help you gain your footing - we search high and low for the best stocks in the U.S. to put in the annual MoneySense Top 500.

We're pleased to say that over the last year our U.S. All-Star team - those American stocks that combine the best value and growth attributes - managed to beat the markets despite the rocky times. They advanced 3.7% over the year, not including dividends. Meanwhile, the S&P 500 (SPY) trailed by 1.2 percentage points, gaining just 2.5% over the same period. Those aren't huge gains, but they're not bad considering the uncertain times.

The MoneySense Top 500 focuses on blue-chip U.S. stocks and, just like our Top 200 Canadian stocks, we evaluate each stock's fundamentals in an effort to find the very best prospects.

We start with the biggest names by selecting the 500 largest public companies in the U.S. based on revenues. We then look for surging stocks by evaluating each for its growth appeal. The fastest-growing get an A, the next best get a B, and so on, all the way down to an F for the stocks that have stumbled. We also grade each stock based on its bargain appeal as a value stock. After all, we want the best we can get for the money. Good deals are given As while pricey divas 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 16 others managed to score at least one A and one B. Both groups are worthy of your consideration.

As always, you should view the Top 500 as a good place to start your own research. Carefully investigate each stock before heading out, and use your own sound judgement before buying. To help you find the best, we've included a wealth of data in our tables.

To get top marks each stock must pass a series of strenuous tests. On the value front, we want stocks to sell at modest price-to-book-value ratios and have lighter than average debt loads. They also must be profitable and pay dividends. On the growth side, we look for increasing sales and earnings per-share. In addition, we like strong returns on equity, healthy market performance, and low-to-moderate price-to-sales ratios.

After sizing up all of the candidates, we were happy to see four of last year's All-Stars make the cut again this year. The veterans are Comcast, CVS Caremark, L-3 Communications, and Northrop Grumman. Indeed, Comcast, CVS Caremark, and L-3 Communications have now passed the test for the fourth year in a row.

Now let's zero in on the four stocks that picked up both a coveted A for value and an A for growth. Two of our returning All-Stars - Comcast and CVS Caremark - managed to score double-As this year, along with newcomers Dillard's and Tyson Foods.

Comcast (CMCSA), of Philadelphia, Pennsylvania, is the country's largest cable firm and it skated through the recession with flying colours. Encouragingly the company initiated a dividend in 2008 which it has regularly increased each year since then. It has also been buying back shares at the same time, which tends to be a mighty fine combination.

CVS Caremark (CVS) is a diversified pharmacy firm which runs a slew of drug stores across the U.S. This sprawling empire is headquartered in Woonsocket, Rhode Island, and it has been a steady dividend grower, and share repurchaser, in recent times. But, the firm has an acquisitive nature which maybe a concern.

Dillard's (DDS) runs 291 department stores in the U.S. and 14 clearance centres from its Little Rock, Arkansas headquarters. As you might imagine, it has struggled over the last decade as department stores have declined in popularity. Indeed, it's boffo earnings growth over the last three years reflects a rebound from very weak results. However, the firm's earning have broken out to higher levels compared to those seen over the last decade and the company recently boosted its dividend.

Tyson Foods (TSN) of Springdale, Arkansas, sells chicken, beef, and pork to customers in the U.S. and over 100 countries world wide. Although the company has bounced back nicely from the lows of 2008, its profits tend to fluctuate and analysts are pointing to a bit of a slow down next year. But the forecast for longer-term earnings growth remains robust.

As always, remember that stock screens have their limitations. Even the most carefully screened stock is not without risk. Make sure that a company's situation hasn't 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 you should always do your homework before you head out into the markets.

First published in the December/January 2012 edition of MoneySense magazine.

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