The Top 500 American Stocks | 2013

Canadian stocks have many fine qualities but are far less numerous than their U.S. counterparts. It’s only natural to look across the border for bargains to round out a diversified portfolio. That’s why we extended the Top 200 methodology stateside and are pleased to present this year’s MoneySense Top 500 guide to U.S. stocks.

As with Canada, we measure each stock based on its appeal as a value investment and its growth potential. Stocks with the best combination of both attributes are drafted into the U.S. All-Star team. We’re happy to say last year’s team fared very well indeed. Our picks shot up by an average of 21.9% since last time. Meanwhile the S&P 500, as tracked by the SPDR S&P 500 ETF (SPY), climbed 16.8%. As a result, the All-Stars beat the market by 5.1 percentage points, not including dividends.

The Top 500 uses the same strategy as the Top 200 but is applied to U.S. stocks. We focus on the numbers to unearth the best prospects without being swayed by the intangibles of a particular business.

We begin with the 500 largest U.S. public companies, based on revenues in the Bloomberg database. Stocks with the best growth characteristics are awarded As, the next best Bs, and so on, down to Fs for stocks sorely in need of improvement. We also grade each stock based on its merit as a value investment. The best bargains get As while pricey glamour firms, which often tempt investors like sirens, take home Fs.

To get top marks each stock must pass some strict tests. For growth, we favour firms with good records of increasing sales and earnings per share. We also like strong returns on equity, healthy market performance over the last year, and low-to-moderate price-to-sales ratios. For value, stocks should sell at modest price-to-book-value ratios compared to peers and the market. We view high debt loads negatively and give extra points to profitable ventures that pay dividends. To get to the top of the class, a stock must past muster on all qualities but may eke by with a B if found only slightly wanting.

Ideally a stock gets a double-A rating, making it both an outstanding growth and value candidate, but that’s unusual. Only four were awarded double-As this year, but 22 others scored at least one A and one B. Both groups are well worth consideration.

Keep in mind that just because a stock has good grades does not mean it’s risk-free. We think such stocks have all the right ingredients necessary for success, but the future is fraught with uncertainty and some will inevitably disappoint. As a group, our top stocks have sometimes trailed the overall markets. It’s an important factor to be aware of. Regrettably, there are no sure things in the stock market but our goal is to tilt the odds in your favour.

The Top 500 is a wonderful place to start your search for good U.S. stocks. Our data package includes a plethora of information, making this one of the best sources for investors looking to enhance portfolios with U.S. stocks. In fact, the Top 500 stock table is so huge we had to put it online where you can pore over a variety of facts and figures.

Sector Diversification

To encourage more diversification, we decided to look at this year’s best U.S. stocks by sector. Not only is it a good idea to spread investments around geographically, but wise investors opt to buy across multiple industry groups. It’s not a surefire prophylactic against market crashes, when multiple sectors fall at the same time, but it cushions the blow in the common event of one sector catching a cold.

Problem is, sector diversification is difficult in Canada. We’re overly concentrated in just three major sectors: financials, energy and materials. Those who stick only to Canadian stocks have portfolios heavily skewed to these companies. Regrettably, pickings are slim in other sectors: Canada has few health-care or technology stocks.

That’s why we’ve refined the Top 500 this year by drawing your attention to U.S. stocks in five sectors poorly represented in Canada…

To find out which stocks made the cut, pick the December/January 2013 issue of MoneySense or download the Top 500. The premium package comes complete with PDF articles and Excel tables showing grades for the Top 200 Canadian stocks, the top 1,000 American stocks, 100 bonus Canadian stocks as well as The MoneySense Guide to Investing in Stocks. The basic package includes the Top 200 Canadian stocks and 1,000 U.S. stocks.