The S&P 500’s 10 Best Stocks Heading Into Q4

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The best stocks in the S&P 500 through the end of the third quarter are an eclectic bunch. The list of top performers spans both big consumer brands and lesser-known commodity stocks, stocks that continue to run and stocks that have rolled back lately.

best stocks of 2014But one thing they all share is a market-trouncing performance over the last nine months — with returns ranging from 50% to 80%.

As we enter the fourth quarter, there are high hopes that the market will keep running after cold weather at the start of the year held back GDP growth. A strong second quarter seems to support a snap-back in consumer and business spending, and third quarter earnings over the next several weeks will tell us if the economy is indeed on the right track.

But even if we hit a speedbump, many of these top stocks have a lot to offer in any environment thanks to efficient management, great products or simply being in the right industry at the right time.

Here are the top 10 performers in the S&P 500 thus far, as well as their outlooks for the rest of the year.

#10 Stock in the S&P 500 — Newfield Exploration (NFX)

best stocks of 2014, newfield stockYTD Return: 51%
Q3 Return: -16%
Market Cap: $5 billion
Industry: Oil & Gas Exploration

Newfield Exploration (NFX) was literally the top dog in the S&P 500 through Q2, but other components have managed to chug higher while NFX stock has kind of hit a rut.

But don’t let the recent softness in shares cast too big of a shadow over things. NFX remains one of the best performers in the S&P 500.

As the name implies, Newfield is all about oilfield services and exploration. While the company has a small amount of offshore drilling in Asia, it is mainly focused on production in the Midwest, Rocky Mountains and Texas. These regions are rich with reserves, and the hopes of an increasingly favorable onshore drilling environment in 2014 are lifting NFX.

Newfield admittedly has softened up, in part because energy prices have softened up too so some exploration just isn’t as profitable as it was several months ago. But decent numbers and a constant drumbeat of positive sentiment and buying still makes this one of the S&P 500’s best stocks in 2014.

#9 Stock in the S&P 500 — Alcoa (AA)

best stocks of 2014, alcoa stockYTD Return: 54%
Q3 Return: 9%
Market Cap: $19 billion
Industry: Metals

Commodity stocks were gutted by the Great Recession, as global demand tanked and as a stronger dollar held back prices of everything from metals to grains to oil

However, Alcoa (AA) has finally hit its stride after cuts stabilized the aluminum giant — and after what looks like an industrial recovery in America and Europe has helped prop up demand once more.

Pricing is still admittedly weak for many commodities, and revenue remains very challenged. But Alcoa recently posted its best post-crisis earnings thanks to efficiencies and right-sized operations.

There is a risk Alcoa could run out of gas, however, now that the aluminum company has a forward P/E of about 18 and shares have rolled back from 2014 highs.

But if you believe in a sustainable recovery that will boost aluminum demand around the world, then Alcoa is a great cyclical play even at these levels.

#8 Stock in the S&P 500 — Edwards Lifesciences (EW)

best stocks of 2014, edwards lifesciences stockYTD Return: 55%
Q3 Return: 17%
Market Cap: $11 billion
Industry: Medical Devices

Edwards Lifesciences (EW) just sounds like one of the best stocks to have in your portfolio. The company is full of really smart scientists creating heart valves and other cardiovascular products to help terminally ill patients. I mean, who doesn’t want to believe in a company that helps terminally ill teenagers growing up to live active lives all thanks to innovative artificial heart valves?

It’s not just the narrative that works for EW, either. Look at the numbers and you’ll see a medical stock that has gone from roughly breakeven a few years ago to soundly profitable — and despite tremendous performance of its stock in 2014, a company that is pretty fairly valued at just 27 times forward earnings.

Healthcare is a great industry because it’s stable, and with heart disease as one of the top causes of death in the U.S. it is safe to say Edwards isn’t going anywhere. Bake in continued growth from new products and treatments and you understand the enthusiasm for this high flier in 2014.

#7 Stock in the S&P 500 — Electronic Arts (EA)

best stocks of 2014, electronic arts stockYTD Return: 56%
Q3 Return:-2%
Market Cap: $53 billion
Industry: Pharmaceuticals

Electronic Arts (EA) is the iconic video game company behind such console-based hits like the Madden football series and the Battlefield action combat game.

This latter series has long been a cash cow, but EA stock took it on the chin this December on fears that the video game company had botched the latest incarnation through a host of technical bugs that created big headaches for players. However, sentiment rebounded on both the game and on Electronic Arts as a result, making EA one of the best stocks in 2014.

Additionally, there’s high hopes for a recent partnership with Microsoft (MSFT) to provide hit EA titles directly to Xbox users for a fee of $4.99 per month. Cutting out the middle man of retailers means better margins and less overhead as content is delivered electronically, and a steady revenue stream from subscriptions is nice for stability.

Video game stocks are a feast-or-famine affair, because consumer tastes can change fast. In fact, for the last few months EA has hit a rut as no new news has broken to catalyze another move higher.

But with some powerful franchises and earnings that are at multi-year highs, there could be continued success ahead for Electronic Arts stock in Q4 and beyond as we enter another important holiday shopping season.

#6 Stock in the S&P 500 — Micron Technology (MU)

best stocks of 2014, micron technology stockYTD Return: 58%
Q3 Return: 0%
Market Cap: $36 billion
Industry: Semiconductors

Micron (MU) had an admittedly bad run across 2011 and 2012, characterized by big losses and a continued restructuring to adapt to the new demand for memory products in a mobile age.

The resulting turnaround in the last 18 months, however, has been very impressive — and delivered huge gains to shareholders. Shares are up an impressive 58% in 2014 — and up 450% since January 2013.

But even after this impressive run, the company still is valued at just 8.2 times forward earnings. Furthermore, earnings continue to grow briskly — topping expectations in each of the last four quarters.

Revenue has soared too, from $9 billion in fiscal 2013 to a total of $18.4 billion through the end of fiscal 2014.

Sure, Micron’s chips and memory gear isn’t as sexy as the high-end smartphones you see all over subway ads. But clearly the company is doing big business in a mobile age, and investors are reaping the benefits.

#5 Stock in the S&P 500 — Under Armour (UA)

best stocks of 2014, underarmour stockYTD Return: 59%
Q3 Return:15%
Market Cap: $14 billion
Industry: Apparel

Under Armour Inc (UA) is a force on Wall Street. Shares of the performance apparel company are up an amazing 59% year-to-date in 2014, and up about 200% since early 2013 accounting for a UA stock split earlier in 2014.

The reason for the enthusiasm is simple: The growth at Under Armour is simply unrivaled elsewhere on Wall Street, making it one of the best stocks in the entire S&P 500.

UA just posted its 17th consecutive quarter of 20%-plus revenue growth, a simply amazing feat. If that wasn’t enough, back in July, management also raised guidance for FY2014 … for the third time this year. The forecast is now for a 28% to 29% revenue increase, up from an already brisk 24% to 25% range. When you beat this consistently and still consistently raise targets, that says a lot.

Athletic apparel sales have nowhere to go but up, so even if UA doesn’t claw much market share from companies like Nike (NKE), it’s still participating in a growing marketplace.

Given its great performance and continued impressive guidance, the sky is the limit in 2015 for UA stock. I actually just named UA stock one of my favorite stocks to buy for Q4 despite its big run already year-to-date, and I don’t see Under Armour slowing down anytime soon.

#4 Stock in the S&P 500 — Allergan (AGN)

best stocks of 2014, allergan stockYTD Return: 61%
Q3 Return:5%
Market Cap: $53 billion
Industry: Pharmaceuticals

Allergan (AGN) is one of those next-era biotechnology companies, producing niche neurology drugs as well as its bread-and-butter Botox cosmetic products. It’s more recent blockbusters and pipeline of potential cures makes it attractive not just as a growth opportunity, but also as a buyout target.

The biggest reason AGN stock has popped in 2013 is because of a proposed buyout from rival Valeant Pharmaceuticals (VRX) that resulted in a big pop back in April. But Allergan shareholders are considering rebuffing any buyout, either because they expect a bigger premium to be paid or because there is enough organic growth to power future success.

Thus far, Wall Street has been reluctant to bid AGN much lower than $160 a share, and it’s clear that the buyout premium from this spring will stick around even if the deal isn’t done in the short term.

#3 Stock in the S&P 500 — Avago Technologies (AVGO)

best stocks of 2014, avago stockYTD Return: 67%
Q3 Return: 18%
Market Cap: $22 billion
Industry: Semiconductors

It’s funny how, in a post-PC age, many old school electronics manufacturers have fallen by the wayside. But while mobile players are all the rage, that hasn’t stopped boring old semiconguctor supplier Avago Technologies (AVGO) from racking up more than 65% in gains YTD and being one of the best stocks of 2014.

And even after this run, Wall Street continues to discount the electronics company with a forward price-to-earnings ratio of just 13.5!

True, AVGO isn’t as buzzworthy as social media momentum players. But it is a diversified business, serving the electronics needs of healthcare companies, the military, automakers and dozens of other businesses in between. In today’s wired world, the demand for chips in all manner of products is very strong, and AVGO is cashing in on this baseline demand.

Additionally, restructuring in 2013 has paid off through big profitability in 2014, and investors have ridden this tech stock to big success as a result.

#2 Stock in the S&P 500 — Keurig Green Mountain (GMCR)

best stocks of 2014, keurig stockYTD Return: 76%
Q3 Return: 4%
Market Cap: $21 billion
Industry: Consumer staples

Keurig Green Mountain Inc. (GMCR) fell from grace in 2011 as the company’s iconic K-Cup system finally reached market saturation and investors gave up on this momentum stock. But thanks to continued improvements in revenue and profits and a normalized valuation, the company has put on quite a second act with gains of almost 75% YTD.

Of particular note is the big partnership with Coca-Cola (KO) to start the year, adding both a good springboard to GMCR in the near term as well as fueling the continued chatter about a buyout from Coke or some other beverage giant.

GMCR has admittedly been sleepy as of late, not trading all that much higher than where it was in February after the Coca-Cola news broke. However, strong Q3 numbers in November could spark another leg up for this company.

#1 Stock in the S&P 500 — Southwest (LUV)

best stocks of 2014, southwest stockYTD Return: 80%
Q3 Return: 22%
Market Cap: $23 billion
Industry: Airlines

Southwest (LUV) had a roaring 2013, gaining 85% on the calendar year. But if you thought that the low-growth, low-margins nature of the airline business guaranteed a fall to earth in 2014, think again.

Southwest has been red hot again in 2014, with gains of 80% so far since Jan. 1. That puts the total return since the beginning of 2013 at an amazing 230% in less than two years!

Much of the success for LUV stock is the simple fact that Southwest remains one the best-run airlines out there, as both a model of efficiency and continued dominance at the top of customer satisfaction surveys.

But throw in the merger between a bankrupt American Airlines and U.S. Airways (LCC) consolidating power (and boosting fares) in the industry, a cyclical recovery in travel as the economy mends and low oil prices keeping jet fuel inexpensive and it all adds up to a powerful performance from LUV.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP


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