Past performance may not guarantee future results, but as this group of S&P 500 winners shows, it can be a good starting point for looking forward.
The goal here was to figure which of 2011’s hotshot S&P 500 stocks could be ready for another star turn in 2012. So first, we examined the index’s top performers year-to-date as of Dec. 8, as calculated by Capital IQ. Then we culled companies that either were about to be acquired, such as El Paso (NYSE:EPG), or stocks that trade near or above the average one-year price target of Wall Street analysts, such as Intuitive Surgical (NASDAQ:ISRG) and Chipotle Mexican Grill (NYSE:CMG). To make the list, the companies needed to offer at least a double-digit upside, according to Wall Street analysts’ average one-year price target.
What’s interesting about the names that made the list are their diversity. This select bunch includes everything from oil and gas companies, such as Cabot Oil & Gas (NYSE:COG), to apparel giant VF Corp. (NYSE:VFC), to health insurer Humana (NYSE:HUM).
Of course, there are a few caveats. First is the unpredictable nature of the economy. No one knows whether the debt crisis in Europe will worsen and drag the U.S. (and perhaps the world) into a recession. None of the listed companies, however, seems particularly dependent on Europe.
If left to its own devices, the U.S. economy may show some improvement, which should benefit these sweethearts. The recovery, though, promises to be anything but robust. Economists on average are expecting real GDP growth in the U.S. of 2.4% for all of 2012 and for unemployment to creep down to 8.6%. The companies highlighted here aren’t immune to a double-digit recession, but they may be able to weather it better than most.
So here they are. The data, provided by Capital IQ, is as of Dec. 8, and the companies are listed in order of potential upside.
Range Resources (NYSE:RRC)
2011 gain: 46%
Recent price: $63.97
Average one-year price target: $78.74
Potential upside: 23%
Range Resources, a natural gas explorer, has reported better-than-expected earnings for the past five quarters. The Fort Worth, Tex., company is a big player in the Marcellus shale natural gas deposits, and in October, it raised its full-year production and spending forecast.
Experts argue that the potential in the Marcellus shale is huge. A recent industry-funded study by Penn State predicted that the amount of gas produced in the Keystone State could nearly triple within the next decade. Add to that the growing demand for natural gas as a less-polluting alternative to coal, and Range Resources looks to be in a strong position for years to come.
Cabot Oil & Gas (NYSE:COG)
2011 gain: 113%
Recent price: $81.38
Target price: $96.38
Potential upside: 18.4%
In October, Wall Street forgave Cabot for missing earnings expectations for the third quarter by a penny because the Houston-based independent oil and gas company also announced that it expected 2012 production to rise 45% to 55%. Some analysts thought the forecast was conservative. On the conference call, CEO Dan Dinges wasted little time patting himself and his company on the back.
“Cabot’s numbers are unmatched. In fact, I’ve been in the business for over 30 years, and it’s rare that I’ve seen numbers that can demonstrate this amount of growth in a cash-flow-neutral to cash-flow-positive program,” he said.
Though analysts see an upside to Cabot stock, it remains pricey, trading at a price/earnings ratio of 58.26, a significant premium to both its peers and the S&P 500. Then again, Cabot routinely posts better-than-expected earnings and should benefit from robust demand for natural gas, which the Energy Information Agency expects to hit 23.55 trillion cubic feet, in 2035 up 16% from 2009.
Biogen Idec (NASDAQ:BIIB)
2011 gain: 63.6%
Recent price: $110.39
Target price: $124.88
Potential upside: 13.12%
Strong sales of Biogen’s multiple sclerosis drugs helped the Weston, Mass., company post better-than-expected quarterly results. Shares were boosted in October after Biogen reported “robust” results in a clinical trial and no new safety concerns for its experimental MS drug, BG-12. Finding safe and effective treatments for MS, a degenerative neuromuscular disease that has no cure, has proven to be difficult and expensive. If it wins approval, BG-12 would compete head-to-head with the first orally administered drug, Novartis’s Gilenya. Peak-year sales of BG-12 are expected to top $2.5 billion.
Wall Street analysts forecast Biogen’s revenue to rise 5.9% in the current quarter and 7.7% in the March time period. Biogen’s multiple of 23 on a trailing basis is in the middle of where it’s been within the past five years and a slight premium to its sector and the S&P 500.
Humana (NYSE:HUM)
2011 gain: 56%
Recent price: $87.41
Target price: $96.97
Potential upside: 12.08%
The reason why Humana made this list is simple: outperformance. Shares of the Louisville, Kent., company soared to their highest levels in four years after it raised its full-year outlook and gave better-than-expected guidance for 2012. The guidance didn’t even include results from two acquisitions expected to be closed by year-end that could add as much as 15 cents to earnings.
As consumers gain more confidence, they’re willing to spend money on health care that they had delayed because of worries about affordability. Humana also is benefiting from demographics as America’s population gets older.
According to the Pew Research Center, every day for the next 19 years 10,000 baby boomers will retire. Many will need the services Human sells, which are already growing in popularity. Humana expects enrollment in its Medicare Advantage plan to increase by 145,000 to 155,000 members in 2012. An additional 500,000 to 600,000 could sign up for its Medicare Part D drug plans.
VF Corp. (NYSE:VFC)
2011 gain: 56.8%
Recent price: $86.54
Target price: $96.57
Potential upside: 11.6%
VF is having a great year. In June, the Greensboro, N.C., firm, whose brands include Wrangler jeans, snapped up Timberland, a maker of hiking boots and outdoor apparel, for $1.8 billion. The deal, the largest in VF’s history, will increase per-share profit by 25 cents this year and by 75 cents in 2012.
The company reported record third-quarter profits that beat Wall Street expectations, raised earnings guidance and boosted its dividend. Investors, though, appear to be concerned about gross margins, which fell in the third quarter to 45.3% from 46.5% in the 2010 period. However, the decline is hardly a surprise given that VF’s production costs are on the rise. CEO Eric Wiseman, for one, isn’t losing sleep over the situation.
“Our businesses continue to post healthy and very profitable organic growth, and the acquisition of Timberland further strengthens our portfolio with the addition of two outstanding outdoor brands,” he said in the earnings release.
If consumer spending continue to strengthen, VF should do fine given that many of its brands are aspirational: People wouldn’t purchase them unless they’re fairly confident about their finances.
Jonathan Berr does not own shares of the stocks mentioned here.
