10 Best S&P 500 Stocks of Q1

by Jeff Reeves | March 26, 2013 10:26 am

[1]If you’ve been caught up in headlines about Washington spending, a eurozone breakdown thanks to Cyprus or general doom and gloom about the economy, you might have missed a heck of a rally in the stock market this year. The S&P 500 is up about 9% year-to-date as of this writing and continues to flirt with all-time highs.

Not all stocks are created equal, of course. Some investors have been left behind — and some have made dramatic returns after just a couple of months of trading in 2013.

So what are the highest-flying stocks on Wall Street, and will their run continue? Here’s a look at the 10 best performers in the S&P, as well as some thoughts about why they have rallied and what’s in store for them for the rest of the year:

#10: Dell

[2]YTD Performance: +43%

Dell (NASDAQ:DELL[3]) was left for dead by many investors after crashing from over $40 in 2005 to a low of under $9 in late 2012. But that fall from grace is seen as a buying opportunity by some.

Right now there’s a bidding war for Dell[4] among three groups: Billionaire investor Carl Icahn, Blackstone Group (NYSE:BX[5]) and a consortium of investors including founder Michael Dell, private equity group Silver Lake Partners and Microsoft (NASDAQ:MSFT[6]).

Who knows where Dell stock will wind up in the long run, but the result of this fight to take the company private has been a big pop in share prices.

#9: Celgene

[7]YTD Performance: +44%

Celgene (NASDAQ:CELG[8]) is a biopharmaceutical company that focuses on niche drugs serving cancer and immune diseases. While the patient pools can be smaller, the treatments also can be very high-margin products and thus make up for reach with profitability.

Celgene kicked off 2012 with serious buzz thanks to impressive reviews[9] at a JPMorgan healthcare conference that resulted in a slew of upgrades from top Wall Street firms. However, some investors are worried that CELG stock has all the profits already baked in.

Still, the long-term potential of its cancer cures and drug pipeline might give you reason to consider a position.

#8: Safeway

[10]YTD Performance: +44%

Big-time grocery chain Safeway (NYSE:SWY[11]) is a boring and tough business. It sells foodstuffs at low margins, and most investors weren’t hot on the stock in 2012.

But an interesting combination of events led to an explosion in Safeway stock prices this February. At the same time a large group of short sellers were betting against the stock, it posted strong earnings[12] that beat estimates nicely. Roughly one-third of outstanding shares were held short, which resulted in a big-time squeeze as traders abandoned ship and moved the stock higher.

Such short squeezes are hard to predict, but it’s worth calling out Safeway for the potential the longs can tap into once a short-side bet sours. Positive buzz over spinning off its gift-card operations[13] also is a plus.

#7: Marathon Petroleum

[14]YTD Performance: +44%

The timing was perfect in a 2011 spinoff of Marathon Petroleum (NYSE:MPC[15]) from its sister company Marathon Oil (NYSE:MRO[16]), which engages mainly in exploration and production. MPC has doubled in the last 12 months and is up about 44% year-to-date as of this writing, while the exploration arm of Marathon has lagged the market in both time frames.

The reason? Refiners have seen their input costs fall[17] as West Texas Intermediate crude prices have been soft, but margins have been great as gas prices remained high. The spread has started to narrow, so some worry the run might be over, but it’s hard to argue with the tape so far in 2013 for refiners like Marathon Petroleum.

#6: Tenet Healthcare

[18]YTD Performance: +45%

Tenet Healthcare (NYSE:THC[19]) owns and operates hospitals, surgery centers and other medical facilities across the U.S. While many medical stocks are facing uncertainty thanks to the Affordable Care Act (also known as “Obamacare” to some), one of the businesses sure to benefit is the hospital industry[20] as coverage expands and more patients start to use services.

Couple that with a significant stock buyback plan, and you understand the breakout in 2013 in anticipation of strong numbers in the years ahead.

#5: H&R Block

[21]YTD Performance: +53%

Tax preparation firm H&R Block (NYSE:HRB[22]) was one of the few companies that can say it benefited nicely from all the fiscal fuss in D.C. over the last few months. That’s because with complex changes to the tax codes and some confusion among taxpayers, Americans are more likely to drop in and have a professional file their taxes this year.

H&R Block is an extremely cyclical business that books nearly all of profits in a very short time frame during tax season, so speculators have piled in anticipating results from January through April to be quite strong. Of course, widespread errors and the cloud of a lawsuit[23] have admittedly taken the bloom off the rose lately … so expecting continued gains for the stock could end badly.

#4: Micron

[24]YTD Performance: +56%

Micron Technology (NASDAQ:MU[25]) makes semiconductors and flash memory for use in a host of high-tech products, from computers to cars to mobile devices.

The semiconductor business hasn’t been grand over the last few years as the “post-PC age” weighs on traditional computer stocks and the margins get thinner for chipmakers and component manufacturers like Micron. However, the supply-and-demand balance seems to be working itself out, as a nascent recovery starts to bolster electronics sales and consolidation in the industry has allowed a floor under pricing.

Recent upgrades have pushed the stock to a 52-week high as of this writing, and if the dynamics of an improving semiconductor market hold, MU could continue its run. However, just beware that the company has had a lot of trouble turning a profit, and there still are risks.

#3: Hewlett-Packard

[26]YTD Performance: +62%

What to say about Hewlett-Packard (NYSE:HPQ[27])? The company has been a poster child for mismanagement and complacency, with a revolving door on the CEO’s office and a spate of ill-advised acquisitions from Autonomy[28] to Palm[29]. But as the stock was gutted from around $54 in 2010 to under $12 a few months ago, investors started to wonder if things were finally turning around — or at least, whether things could get any worse.

Meg Whitman revealed a painful five-year plan back to success[30] in October and the stock cratered, so it’s anybody’s guess whether this rally is a short-lived bounce or a sustained rebound that signals recovery at HP. But either way, if you bought in December, you’re now sitting on a very pretty profit in Hewlett-Packard stock.

#2: Best Buy

YTD Pe[31]rformance: +89%

Best Buy (NYSE:BBY[32]) is another one of those stocks that was battered for good reason. Amazon.com (NASDAQ:AMZN[33]) has pushed prices on big-ticket electronics down and has resulted in razor-thin margins for all retailers — particularly the brick-and-mortar crowd like Best Buy. Furthermore, the continued rise of digital entertainment options and the secular decline in hard copies of video games, CDs and DVDs has hurt media sales.

There hasn’t been a lot going for BBY … but founder Richard Schulze changed that when he started making fuss about taking the company private. It seems that the buyout buzz is now over[34] and that the company will remain public, but the pop in share prices has stuck.

#1: Netflix

[35]YTD Performance: +95%

Netflix (NASDAQ:NFLX[36]) is a volatile tech stock, but that’s to be expected since it’s the first mover in streaming video. At the same time that it has seen rapid expansion, especially abroad, there has been increased competition across the board as many other companies want a share of this lucrative marketplace.

Netflix had a lot of growing pains in 2011 and 2012 as it botched a transition away from DVD rentals[37] and has bled cash on original programming[38] and new content deals[39]. As a result, the company still remains significantly below its all-time high of about $300 just two years ago.

Still, a doubler in Q1 is nothing to sneeze at — and if these long-term plans for international growth pan out, there could be more gains ahead.

Jeff Reeves[40] is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[41] Write him at editor@investorplace.com[42] or follow him on Twitter via @JeffReevesIP[43]. As of this writing he did not own a position in any of the stocks named here.

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