by Jeff Reeves | September 27, 2013 1:41 pm
Investors have gone on one wild ride in 2013. The year started with almost 7% returns in the first several weeks to front-load big gains, and since then nothing has stopped this rally.
As of this writing, the S&P 500 is up 19% year-to-date — pacing the best annual return since the rebound off the lows in 2009, and the second-best annual return for the index in 10 years.
Of course, anything can happen as we close out the year. The debt ceiling debate is looming large and there are concerns about whether the Federal Reserve will change course on policies that could adversely affect the economy or the stock market.
And, of course, even in a bull market there are some dogs that lag the indices and continue to lose money for investors.
But some stocks have racked up gains that look untouchable even in the face of bigger economic issues. Some are turnaround plays, some are innovative companies researching powerful new products and others are just in the right place at the right time.
Here are the 10 best stocks of 2013 so far, based on the top performers in the S&P 500 through Sept. 26.
Industry: Consumer staples retail
Year-to-Date Returns: 80%
Grocery stores are hardly an exciting business. The grocery game is notoriously low-margin thanks to frugal shoppers and high competition, the nature of a national distribution network for perishable foods can be maddening, and most grocery chains are regionally landlocked with little room for growth.
So what gives with Safeway (SWY)?
Well, to start the year, roughly one-third of outstanding Safeway shares were held by short sellers — that is, investors betting against the company. But rumblings about a potential buyout either for all or part of the company sent the bearish investors scurrying for the exits and boosted the stock. From January to April, SWY tacked on more than 60%.
Shares then rolled back a bit as the hubbub waned, but more recently word that an aggressive hedge fund took a big stake in Safeway has rekindled rumors of buyout prospects — or at least an ambitious new mission to unlock value.
As a result, after a sleepy summer, Safeway stock is up about 25% in the past few weeks, making SWY one of the best stocks in the entire S&P 500.
Year-to-Date Returns: 81%
Vertex Pharmaceuticals (VRTX) is a case study in the volatility of development-stage pharmaceutical companies.
Though VRTX is bleeding cash as it races to research treatments, investors are so pleased with the prospects of what they see that they are willing to buy shares hand over fist even though the profits haven’t materialized yet.
Vertex specializes in “small molecule” drugs. Without getting too technical, that means Vertex treatments bind to cells in the body either to activate or inhibit certain cell functions. Right now its treatments are intended to target hepatitis, cystic fibrosis and epilepsy among other conditions.
After its potential cystic fibrosis drug saw strong results in a clinical trial, shares shot up from about $50 to $80 in April. The drug pipeline has been quiet since then, so Vertex has mostly moved sideways … but the big jump and the leap of faith by investors should show you the optimism some have about Vertex.
Of course, one bad trial could reverse those fortunes. So investors need to remember that a stock like Vertex, which operates in the red and is banking on future profits, can sour just as fast if things don’t pan out.
Industry: Financial Services
Year-to-Date Returns: 88%
A bull market is doubly kind to a company like E*Trade Financial (ETFC). In addition to the broader sentiment that is lifting stocks across the board, a bullish mentality among traders increases activity among customers for this online brokerage — and subsequently, the fees that E*Trade can charge.
That’s a double-edged sword, of course. When the financial crisis hit, traders were terrified of the stock market and bailed out altogether. At the same time, folks who lost their jobs and were struggling to keep their houses couldn’t put money in the stock market even if they wanted to. As a result, ETFC is down about 95% from its 2006 highs.
However, stability in capital markets coupled with a bit of recovery have turned the tide at E*Trade. Taken with a serious cost-cutting mission, ETFC’s profitability has improved as the dust has settled in the wake of the financial crisis.
That has been good for all investors — both E*Trade customers looking to trade the market, and those who own ETFC stock specifically.
Year-to-Date Returns: 91%
Celgene (CELG) is a specialized biotech company that focuses on treatments for small patient pools suffering from cancers and blood disorders. While there may not be a whole lot of candidates for Celgene’s drugs, the reality is there aren’t a lot of alternatives, and the treatments are very costly — and thus, high-margin products.
Celgene kicked off 2012 with a bunch of analyst upgrades and high hopes for its product pipeline, which includes new treatments for cancer and inflammatory diseases. And while the stock appears to be aggressively valued based on current profits, it’s undeniable that there is a lot of potential in future sales.
Celgene is growing its sales at roughly $1 billion a year. And consider this: 2012 profits were a little less than double 2010 profits, 2013 profits should be roughly double 2011 numbers, and projections for 2014 are roughly double what CELG earned in 2012.
A company that is expected to double its profits every two years is clearly a powerful investment, and Wall Street has already targeted CELG as one of its best stocks so far this year.
Industry: Specialty Retail
Year-to-Date Returns: 101%
GameStop (GME) was down to its last quarter in mid-2012 as the threat of digital downloads threatened to destroy its brick-and-mortar video game business. There were rumblings that the big video game companies would start cracking down on used games — a big part of GameStop’s business — and pressures as games migrated to mobile devices was huge.
But then relief swept in this year as the next generation of gaming consoles — including the PlayStation 4 and the Xbox One — decided to pass on safeguards that would prohibit used titles.
That news, followed by better-than-expected earnings even amid the negativity and a capitulation from short sellers, has helped lift GME stock to new multiyear highs lately and has helped it challenge pre-recession highs.
Of course, investors shouldn’t forget that the pressures from downloadable content still remain and that GameStop’s brick-and-mortar model remains threatened going forward.
Year-to-Date Returns: 102%
Airline stocks are tough investments. The industry is characterized by regular bankruptcies, expensive pension costs, high regulation that limits the agility of airlines and broader economic headwinds that have kept consumers and business travelers a bit more grounded than in years past.
However, one airline’s pain is another airline’s opportunity, and as American Airlines (AAMRQ) grapples with bankruptcy and pins its hopes on a merger with US Airways (LCC), Delta Air Lines (DAL) has been allowed an opportunity to show its stuff.
Delta is one of the better-run airlines (at least from a balance sheet perspective — no gripes about customer service, please) and in fiscal 2013 could see four times the profits it saw in 2010 should projections hold.
New money probably can’t look forward to the same upside as Delta has seen in 2013, but the improvement DAL has seen this year is likely to stick after the company has adapted to the current market environment.
Industry: Medical Devices
Year-to-Date Returns: 103%
Boston Scientific (BSX) manufacturers a wide array of medical devices for use in cardiovascular treatments, diagnostic tests, women’s health and other areas.
Like many of the stocks on this list, BSX is a turnaround story with pretty ugly long-term returns but a heck of a pop in 2013. Shares are down about 70% from their all-time highs in 2004 and still remain slightly below pre-recession levels, but a combination of cost-cutting and industrywide trends have conspired to lift the stock.
A 2011 restructuring strategy and subsequent job cuts have helped improve margins, and at the same time investors are very optimistic about the Affordable Care Act (a.k.a. Obamacare) providing greater access to Boston Scientific devices. After all, if more people have more health insurance, then this medical device stock will have more “customers.”
Boston Scientific is expected to be soundly profitable in 2013 after a few years of losses, and investors are taking note. Throw in the fact that healthcare is one of the few sectors of the American economy that is reasonably recession-proof, and you have a strong case for BSX stock.
Year-to-Date Returns: 175%
Semiconductor manufacturer Micron Technology (MU) makes a host of high-tech products found in computers, cars and mobile devices.
While investors typically aren’t too happy about semiconductor stocks broadly, since laptops and PCs continue to decline in sales and related suppliers have taken a hit, Micron stock has been a darling of Wall Street in 2013. But don’t be fooled — the stock’s success has been more about a turnaround for “poor” to “fair” than a sign that Micron has been spared the same pressures as other chipmakers.
The Boise, Idaho, company has had trouble even breaking even for about two years. However, its next quarterly report could finally signal a return to profitability — a big development for the embattled tech stock, and one that investors have been anticipating given the run-up in shares.
Going forward, the picture still is murky for Micron. But considering the negativity that remains out there, it’s possible for MU to move even higher if upcoming results show the company is beating expectations with its turnaround tale.
Industry: Specialty Retail
Year-to-Date Returns: 225%
Best Buy (BBY) is hardly the sexiest stock on Wall Street, with its embattled big-box store locations suffering amid e-commerce competition. However, though sales have mostly flat-lined since 2010, Best Buy has managed to stage a pretty substantial turnaround by slashing costs to offset shrinking profit margins.
In fact, Best Buy might close out this fiscal year with its first annual profit since 2011, and is forecast to then grow earnings a modest 8% again next year.
This turnaround coupled with buyout chatter early in the year, when founder Richard Schulze made some noise about taking his undervalued company private, helped Best Buy stock log a 100% gain by springtime.
This coupled with a broad-based rally for the stock market and short sellers admitting defeat, and it has been off to the races for Best Buy.
So will Best Buy keep things up? Maybe … as mentioned, earnings are improving and the bears have given up the fight against this stock.
However, revenue remains stagnant and the stock seems to have optimism priced in with a forward price-to-earnings ratio of more than 14. On some level, it appears that the biggest gains have already been made for Best Buy investors and it might be prudent to trim back.
Industry: Consumer Services
Year-to-Date Returns: 238%
Netflix (NFLX) got out to a great start in 2013, after posting a surprise profit in January vs. expectations of a loss. The streaming video giant had invested big in international growth and new original programming, and it appeared to be paying off. Shares soared about 60% in just a few weeks on the results.
But that was only the beginning.
Bearish investors shorting Netflix stock were forced into submission, driving the stock higher, and following earnings reports showed that brisk growth has continued — and that quick gain to start the year has continued to make Netflix the best stock of 2013 so far.
The icing on the cake? Original show House of Cards starring Kevin Spacey won an Emmy — proving that NFLX isn’t just about subscriber growth but is also about content creation.
Of course, whether the gains can be sustained is anybody’s guess. Competition is heating up from Amazon.com (AMZN) with its Prime Instant Video, joint venture Hulu Plus and even paid YouTube channels gaining momentum. And even if Netflix can hang on to its market share, the fact that Netflix is valued at almost 100 times next year’s profits is enough to give new investors pause.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.
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