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If you truly want top returns from your stock portfolio, you can't afford to get stuck in anything but the best growth companies you can find. It's true that value investors can sometimes pick up nice bargains on stocks and then turn around and sell them once they've recovered for healthy gains. But if you want to make a fortune from your stock investments, picking the stocks with the best growth prospects gives you the best chance to get multibagger returns within just a few years.
Unfortunately, many stocks that make up the Dow Jones Industrials (INDEX: ^DJI ) are too mature to qualify as growth stocks. That doesn't automatically mean that all Dow companies are past their prime; some reinvent themselves in ways that fosters further growth. But some of them could see big headwinds over the next year -- and that might make them worth avoiding, at least for now.
Later in this article, I'll reveal four Dow stocks that are expected to see negative earnings growth rates in 2012. But first, I want to talk about how slow growers can hold back your portfolio from the gains you deserve -- and how you can avoid them.
Putting on the brakes
At the right price, even no-growth stocks can be worth buying. If a company can promise stable, consistent profits year in and year out for the rest of your life -- and return most of those profits to you in the form of dividends -- then its stock has plenty of value for risk-averse investors who are content to live off dividend income.
But all too often, even seemingly stable companies end up running into trouble. Before the financial crisis, General Electric looked like it was well-poised to capitalize on the finance segment of its business, making it a priority for growth within the company. But when the financial crisis came, it crushed the finance division, forcing GE to take a government bailout and retrench. The stock has survived and even thrived since then, but the conservative investors that thought of it as an ultra-safe holding got a rude awakening.
That's why slow-growth stocks already have one strike against them. If that's the only downside of owning a stock, then it can still make a reasonable holding. But if a company has other problems, then you probably should look elsewhere for better prospects.
Where's the growth?
In a nutshell, if a company can't promise you growth, you'd better have a really good reason to pick it. With that in mind, let's take a look at the Dow stocks with the worst expected earnings growth rates in 2012:
Expected 1-Year EPS Growth
|Travelers (NYSE: TRV )||(47.0%)||15.1||2.8%|
|Hewlett-Packard (NYSE: HPQ )||(16.1%)||7.8||1.9%|
|Verizon (NYSE: VZ )||(2.3%)||16.1||5.0%|
|Pfizer (NYSE: PFE )||2.1%||16.9||4.1%|
Source: S&P Capital IQ. As of Jan. 3.
You can see some obvious conclusions from looking at these stocks. Telecom stocks Verizon and AT&T used to be stolid, low-growth companies that relied on their utility-like landline businesses for sales. But with the growing impact that mobile sales have for AT&T and Verizon, negative earnings growth is a much more troubling sign that they may be paying too much to subsidize sales of hot products like the iPhone. Similarly, Pfizer earns a dependable income stream from its blockbuster drugs, but as worries about the company's patent cliff come to the forefront, the threat of slowing or even falling earnings becomes much more likely.
For Travelers, the figure above is misleading because it partially reflects one-time problems that have already happened and aren't likely to repeat. With the company having had to take disaster-related losses, its projected but not-yet-released figures for the fiscal year will be bad. But looking further out, most analysts see the company recovering nicely.
Hewlett-Packard is the most troubling member of this list. The company has struggled to find solid leadership and has made problematic business shifts, seemingly without an underlying strategy. Until it can find its way forward, shareholders should expect to see further earnings declines.
Don't let your stocks wilt
If I had to pick one of these stocks to buy, it'd be Travelers. But with faster-growing stocks available, growth investors should probably skip all five of these stocks.
If you like growth stocks, you shouldn't stop with the Dow 30. In fact, in our brand-new free report, "The Motley Fool's Top Stock for 2012," we reveal a stock name outside the Dow that has potential for solid long-term growth. Check it out by clicking here and grab your free copy today before it's gone.