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Top stocks for growth at a reasonable price

What are we looking for?

Growth at a reasonable price. Think of these stocks as Wall Street's unsung heroes. They're typically mid-sized and large firms with a history of producing steady, expanding profits. They're not spectacularly cheap, but they are selling at attractive levels in comparison to their growth.

How we did it

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Craig McGee, senior consultant at Morningstar Canada, prepared today's offering. He scoured the CPMS U.S. equity database to find firms with improving profitability, a history of relatively stable earnings and low prices compared with their growth rates. He looked for companies that had:

  • A growing return on invested capital (ROIC). Mr. McGee defined ROIC as earnings before interest and taxes divided by the sum of long-term debt and equity. He sought firms in which the ROIC for the latest four quarters was greater than for the previous four quarters and also greater than the industry average;
  • A relatively low PEG ratio (defined as the price-to-earnings ratio divided by the growth rate of the stock’s earnings per share over the past five years);
  • A positive change in the consensus of analysts’ earnings estimates over the past 60 days; the change also had to be greater than the industry average;
  • Relatively low variability in earnings over the past five years.

Mr. McGee winnowed his list down to the 20 stocks with the best combinations of the above factors. He limited any one sector to no more than three stocks.

More about Morningstar

Morningstar Inc. provides independent investment research in North America, Europe, Australia, and Asia. Its investment research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market.

What we found

Some stocks that you would expect to be on the list – IBM, Lockheed Martin and Campbell Soup to name three. Also, firms that may have escaped your attention, like Sturm Ruger, maker of hand guns. Growth comes in many forms, and this list can help you zero in on attractive prospects. Be sure to do your own research before buying any stocks listed here.

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About the Author

Ian McGugan is a reporter with The Globe and Mail's Report on Business and has been writing about investing, economics and business for more than 20 years. He joined the Globe and Mail in 2010. He has been executive editor of Canadian Business magazine and founding editor of MoneySense magazine. More


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