by Jeff Reeves | July 1, 2013 12:00 pm
A look at the best performers in the flagship S&P 500 Index paints a pretty clear picture: A lot of the picks that were left by the wayside in the last year or two have come roaring back on renewed optimism.
Of course, whether those gains stick and continue in the second half is anyone’s guess. It’s likely that many of these winners might not have much momentum to speak of after the volatility of the summer shakes things up on Wall Street.
But still, it’s worth taking a look through at the biggest winners of the year as a way to explain which sectors were in favor and why — and perhaps find a way to think about which stocks are going to be in favor going forward.
Here are the best 10 stocks in the S&P 500, based on performance from January 1 through Wednesday, June 26.
YTD Return: +50%
Many investors should be familiar with the CME Group (CME) brand simply through regular trading. The company is behind the Chicago Mercantile Exchange that specializes in futures and commodities, and now owns the Dow Jones Indices after a big acquisition a few years ago.
Thanks to the high barrier of entry to any competitors establishing their own futures exchange and passing muster with regulators, CME is very entrenched — especially after the recent BATS disaster in spring 2012.
As economic activity mildly improves and investors start to get “risk on,” activity will heat up on the CME and so will profits for the company. At least, that’s the logic behind the big run-up in 2013 for CME stock.
YTD Return: +51%
While many picks on this list of Top 10 stocks are tech laggards that put on a good show recently, Life Technologies (LIFE) stands out. LIFE is an industrial and life sciences company focused on food- and water-safety testing among other things, and it doesn’t share a heck of a lot with the other players
But it’s easy to see why many like this innovative player. It helps with DNA and RNA analysis tools for a wide range of applications and provides products and services in such cutting edge fields as stem cell research and cloning.
This is clearly not some boring consumer products company, and Wall Street has taken notice. Shares have soared 50% so far in 2013 thanks to consistent growth and big long-term potential in the eyes of investors.
YTD Return: +52%
H&R Block (HRB) is a hard stock to get a read on. It’s a highly seasonal business, doing the lion’s share of its revenue around the April tax deadline each year. It is also a highly cyclical business, because fewer people with jobs means fewer people with any income to pay taxes on.
But it just so happened that the last several months conspired to benefit HRB: Mild but continued improvement in the jobs market, some recovery in housing leading to more potential write-offs for homeowners and sadly the complicated tax shenanigans on Capitol Hill amid the “fiscal cliff” kerfuffle.
Many more folks were confused about how to file in April, and that led to brisk business for H&R Block.
Whether or not that sticks, however, is hard to read since there is so much time between now and next tax season.
YTD Return: +60%
GameStop (GME) remains among one of the most disliked stocks on Wall Street with roughly one-third of available shares held by short sellers. But that hasn’t stopped shares from leaping 60% in 2013 in spite of the negativity.
A big reason for the rally has been those short sellers getting “squeezed” out, forcing them to buy back shares to cover their bets. But there also has been favorable news — for instance, reports from PlayStation and (eventually) Xbox that their newest consoles would support used games — a business crucial to the success of GME.
GameStop remains a very tenuous play in 2013, an era when players can download many games direct to their consoles and when many tablets and smartphones have replaced TV-centric gaming. And even if you need a disc to put in your PlayStation, why go to GameStop instead of ordering online?
But those bigger headwinds made so many people bet against the stock last year – and set the bar so low that GameStop has managed to stage a dramatic rally over the last few months.
YTD Return: +62%
Boston Scientific (BSX) sells medical devices, traditionally implantable heart disease treatments like defibrillators and pacemakers. With Baby Boomers aging and the big problem of chronic heart disease, this is a great segment to be in. Favorable news about new products in the pipeline has many investors bullish about future earnings, and shares have been bid up handsomely as a result.
Of course, there are risks. Some products are not on the U.S. market yet and FDA approval is not always as easy a task as companies hope. Also, like many companies, Boston Scientific has been struggling to grow top-line revenue and has relied on efficiencies and cost-cutting to boost earnings. Still, the potential of healthcare — specifically BSX treatments for heart disease — is hard to argue against in the long term due to the changing demographics of the U.S.
YTD Return: +69%
Hewlett-Packard (HPQ) is a stock that has been feeling the pain on multiple fronts across the last few years. A revolving door in the corner office, ill-advised buyouts of companies like Palm and Autonomy and a general listlessness in the mobile space all conspired against this one-time tech giant.
But Meg Whitman seems to be slowly turning this megacap around, focusing on enterprise hardware and software and cutting costs. Revenue is still under pressure, but the big one-time charges of 2012 are soundly in the rearview, and the restructuring seems to be paying dividends going forward.
And about that dividend — the cash-rich company yields 2.4%, even after the run-up — so investor demand has been propped up by the long-term income potential here, too, as well as the turnaround story.
YTD Return: +74%
Advanced Micro Devices (AMD) has tacked on significant gains since January, flying in the face of previous statements that desktop and laptop businesses are dead in this era of smartphones and tablets.
Well, at least the share price has flown in the face of this argument. There are undoubtedly pressures on AMD as revenue continues to slump and the company remains unprofitable. In fact, AMD isn’t forecast to break even until at least fiscal 2015 — maybe later.
Also, the stock remains 50% below its 2010 highs so it’s hardly like this run-up has made most shareholders break even.
Still, you can’t fight the tape. Investors are optimistic that AMD is either turning around or at worst oversold. But for my money, I wouldn’t bank on these big gains prefacing continued profits in the months ahead.
YTD Return: +110%
Semiconductor manufacturer Micron Technologies (MU) shares the AMD story, left for dead in late 2012 as another unfortunate victim of a post-PC age.
While Micron remains under pressure, it managed to cut costs and project future stability based on efficiencies alone. While MU will still be unprofitable this full year, Wall Street is expecting the stock’s August quarterly report to boast the first profit in two full years.
Investors think there’s something to be said for being less bad and for finding a way to dig out from a loss, even if there isn’t big growth ahead. And if a cyclical recovery boosts chip demand, all the better for Micron. As a result, investors have flocked to this tech issue in 2013.
YTD Return: +129%
What can you say about Best Buy (BBY)? Revenue is stuck and the company has few growth prospects ahead in an era of low-margin electronics, e-commerce competition and digital content upending the need for in-store DVD and CD sales.
This is decidedly not a growth story. But at the beginning of the year, a steady drumbeat of chatter about Richard Schulze taking his company private boosted optimism of a buyout premium for shares. The shorts were squeezed out, investors started to wonder if BBY wasn’t as bad as it seemed, and it has been off to the races since Christmas.
But don’t be fooled — the big Best Buy run coincides with the calendar and masks long-term issues. Shares are roughly back to 2012 highs but down almost 30% from 2011 highs and down 45% from 2010 highs. The company may have bounced back, but it will have a hard time moving higher unless the narrative of a sluggish top line changes.
YTD Return: +130%
Netflix (NFLX) posted a surprise profit to start 2013 and a powerful earnings beat this spring to catapult the streaming video giant to heights not seen since its 2011 heyday when the stock was flirting with $300 a share.
Part of the parabolic run has been a short squeeze, where bears betting against the pick have waived the white flag, but it’s more than that. From original show House of Cards produced in-house, to the deal with Disney (DIS) in December, to its largest-ever deal with DreamWorks (DWA) just weeks ago, Netflix has gotten serious about content and now boasts 30 million U.S. subscribers.
Whether the run lasts, however, is another question. Analysts at Bernstein Research think the run is overdone, and have given the stock an “underperform” rating recently with expectations that the stock will slump from more than its current price of roughly $210 a share to $180 in the next year.
So while the pick is No. 1 in the first half, keep your eyes peeled for what lies ahead.
Jeff Reeves is the editor of InvestorPlace.com. Follow him on Twitter at @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
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