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The Top 500 U.S. Stocks for 2017

The 12th annual MoneySense U.S. All-Star Stocks guides investors to the best U.S. equities on offer. It compiles a buffet of facts and figures on the 500 largest stocks in the U.S. and boils everything down into easy-to-use letter grades. As with their Canadian counterparts, the stocks with the most growth potential and value appeal are promoted to the All-Star team.

The U.S. All-Stars have steamed ahead since the crash of 2008. They jumped by 326%, or 15.9% per year, on average, over the last eight years while the market (as represented by SPY, the SPDR S&P 500 exchange traded fund) gained 213%, or only 9.9% annually, over the same period. Over the last five years the U.S. All-Stars advanced by an average of 16.2% per year and beat the market, which grew by 12.0% per year.

Timing can mean a lot when you're investing. Unfortunately, the All-Stars had a difficult period leading into the 2008 crash and they've been making up ground since then, which has weighed on our cumulative returns since inception. So, if you had purchased an equal dollar amount of the All-Stars in the first year and rolled your portfolio into the new list of All-Stars each year thereafter, you'd have gained 70%, or an average of just 4.9% per year over the last 11 years. By way of comparison, the market gained 77%, or 5.4% per year.

In more bad news, last year's results weren't stellar. The All-Star Stocks fell by an average of 0.4% since the last time and trailed the market, which gained 7.2%. But we hope they'll do better next year. (Remember, the U.S. returns mentioned above do not include dividends and are presented in U.S. dollar terms.)

All-Star American Stocks

Our experience illustrates the perils of investing in a strategy just before it hits a rough patch. Nonetheless, we do think the method is worth sticking to over the long term and we're encouraged by its market-beating performance after the market's largest downturn since 1929. Since the 2008 crash the All-Stars team has only lagged its benchmark twice. It topped it by double digits in three other years over that same span.

The Grades

Like its Canadian counterpart, we select our U.S. All-Stars by focusing on the largest 500 stocks in the U.S. (as measured by revenue) using data from Bloomberg. We start by evaluating each stock for its value potential and then for its growth appeal, assigning each a letter grade, like the ones you received in school. Stocks with good grades are deemed to be worthy of consideration while the laggards should be treated with caution.

To get top marks each stock must pass the same series of strict tests that we use for the Canadian All-Stars. In brief, our growth test favours firms that have increased their sales-per-share and earnings-per-share over the last three years. We also prefer companies with strong returns on equity, healthy market performance over the last year, and low-to-moderate price-to-sales ratios. On the value front we seek stocks selling at modest price-to-book-value ratios compared to their peers and the market overall. We also give extra points to profitable dividend payers and avoid companies with high debt loads compared to their peers because they have a habit of spoiling.

Top stocks get As on both measures, making them outstanding growth and value candidates. Only a few manage this feat each year and this time around three stocks got the double-A prize.

But we think all of the All-Stars are worthy of your time and consideration. These firms managed to get at least one A and one B on the value and growth tests. This year's All-Star team is larger than usual and contains 28 firms.

American All-Star Stocks

The aging bull market gave growth stocks a boost this year. The U.S. All-Star list ballooned to 28 stocks this time around, which is 10 more than there were last year.

All-Star Stocks
Arrow Electronics (ARW)
Arthur J Gallagher (AJG)
AT&T (T)
Avnet (AVT)
Berkshire Hathaway (BRK.A)
Consolidated Edison (ED)
Corning (GLW)
Dollar General (DG)
Fortune Brands Home & Security (FBHS)
GameStop (GME)
Huntington Ingalls (HII)
Interpublic Group (IPG)
Jones Lang LaSalle (JLL)
Kelly Services (KELYA)
Old Republic International (ORI)
Owens Corning (OC)
PulteGroup (PHM)
Quest Diagnostics (DGX)
Reliance Steel & Aluminum (RS)
Republic Services (RSG)
RPM International (RPM)
Tech Data (TECD)
Thor Industries (THO)
Travelers (TRV)
Trinity Industries (TRN)
Unum Group (UNM)
WR Berkley (WRB)

Straight As

We're pleased to say that three stocks won the double-A prize this year. They are Old Republic International, Owens Corning, and Unum Group.

Old Republic International is a property and casualty insurance firm with a general and title insurance business along with the still smoldering remains of a mortgage guaranty insurance business. The firm from Chicago, stumbled badly in 2008 when its mortgage guaranty insurance business cratered. However, the company struggled through and managed to grow its dividend each year despite heavy losses along the way. These days the firm is profitable, trades at 11 times earnings and at just above book value. It pays a generous dividend yield of 4.1% and I own some of its shares.

Owens Corning is a building products company based in Toledo, Ohio. The company has been through some difficult times, but started paying a dividend in 2014 and the payments have been increased every year since then. While its dividend yield is only 1.4%, the company reduced its share count by 2.3% over the last year. That pushes its combined yield up to a more healthy 3.7%.

Unum Group, based in headquartered in Chattanooga, Tenn. is a provider of employee benefits to customers in both the U.S. and the U.K. It trades at just under book value and at only 10 times earnings.

A Buffet of All-Star Stocks

The eight leading value All-Star stocks are Avnet, Consolidated Edison, Corning, GameStop, Jones Lang LaSalle, Kelly Services, Reliance Steel & Aluminum and Trinity Industries.

Corning posted the best performance of the value group with a smart 44% gain over the last year. On the other hand, GameStop fared the worst with a decline of 41% as investors worried about its video game stores, which will likely suffer as customers move online. But the stock trades at just six times forward earnings estimates and pays a 6% dividend yield. That's well into bargain territory. However, GameStop was nudged out as the cheapest value All-Star by Trinity. The railcar company trades at just 93% of book value and six times trailing earnings. At the other end of the spectrum, the most expensive value name is Consolidated Edison, a famous utility that primarily services New York City, which trades at 19 times earnings while paying a 3.7% dividend yield. The 17 leading growth All-Stars are Arrow Electronics, Arthur J Gallagher, AT&T, Berkshire Hathaway, Dollar General, EMCOR Group, Fortune Brands Home & Security, Huntington Ingalls, Interpublic Group, PulteGroup, Quest Diagnostics, Republic Services, RPM International, Tech Data, Thor Industries, Travelers, and WR Berkley. I personally own shares of Berkshire Hathaway.

Huntington Ingalls, America's largest military shipbuilding company, is the top growth performer over the last year with a gain of 53%. The worst performer was Dollar General which chalked up gains of only 4% after its shares tumbled on weaker than expected growth last quarter. The cheapest growth player is home maker PulteGroup, which trades at 13 times earning. After making it through the U.S. real estate crash, the company appears to be gearing up again.

Before rushing to buy any stock it is important to understand the risks that stock ownership entails. While we believe our top stocks have the ingredients necessary for success, the future is far from certain and some stocks will inevitably flounder. There will also be periods - like the crash of 2008 - when stocks generally do poorly. Always make sure a company's situation hasn't changed in some important way before investing. Read the latest press releases and regulatory filings. Scan newspaper stories and get up to speed on all of the most recent developments. Take particular care when buying or selling stocks that trade infrequently.) As always, we endeavour to put you on a profitable course, but head out only after you're fully prepared.

First published in the December/January 2016 edition of MoneySense magazine.

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