As we end the first half of 2018, here are a few questions every investor should be asking:
- Which stocks have been the best performers so far this year?
- Why have those stocks done so well?
- Will those top performers keep heading higher in the second half of the year?
If you don’t know the answers to those questions, no worries.
Here’s a list of the S&P 500’s top-performing stocks year-to-date, including an analysis of how they got here and where they are going next:
Top Stocks of 2018 No. 1: Netflix (NFLX)
Performance YTD: 88%
How It Got Here: Video streaming giant Netflix, Inc. (NASDAQ:NFLX) has been the hottest stock in the market for a while now. Internet TV is a mega-trend that is killing linear TV, and Netflix is the king of internet TV. This has been true for a while, and the company’s leadership position in the internet TV market has only grown thanks to the introduction of a robust original content portfolio.
Due to strong original content growing the company’s already tremendous value prop, Netflix has been adding users at an unprecedented pace while hiking prices without any churn, leading to huge revenue and profit gains.
Where It’s Going Next: Internet TV is a mega-trend that is going global. Considering Netflix is the differentiated and big-moat leader in this space, it is accurate to say that Netflix is marching towards global domination.
The growth prospects of this company, both through global user growth and price hikes, are very big, and perhaps second to none. The valuation on Netflix stock is rich at the present moment, but near-term valuation friction is a minor blip in what will otherwise continue to be a long-term upward trajectory for this stock.
Top Stocks of 2018 No. 2: Tripadvisor (TRIP)
Performance YTD: 64%
How It Got Here: Also unlike Netflix, Tripadvisor Inc (NASDAQ:TRIP) is a 2018 bounce-back story. Competitive risks from Airbnb, Amazon.com, Inc. (NASDAQ:AMZN) and others killed TRIP stock in 2014, 2015, 2016 and 2017. But 2018 has started off with a different narrative, as the company has released back-to-back strong earnings reports which point to strengthening go-forward fundamentals in the travel sector.
Where It’s Going Next: Growth is coming back into the picture, but the valuation is pretty rich at 43-times forward earnings (versus a five-year average forward multiple of 30 and against the backdrop of sub-20% earnings growth).
Consequently, while the fundamentals are improving for TRIP stock, these improvements seem largely priced in after the stock’s year-to-date rally. Gains through the rest of the year will be tough to come by.
Top Stocks of 2018 No. 3: Under Armour (UAA)
Performance YTD: 60%
How It Got Here: Unlike Netflix, which has been red-hot for years, Under Armour Inc (NYSE:UAA) is a 2018 bounce-back story. The company has reported decent earnings so far this year, which underscore a return to revenue growth powered by robust international sales growth. The company’s most well-known endorsers, Stephen Curry and Dwayne “The Rock” Johnson, have been red-hot this year, with Curry again leading his Golden State Warriors team to the NBA championship and The Rock launching new shoes which sold out in minutes.
Where It’s Going Next: The year-to-date rally in Under Armour stock seems to be powered by dreams, hype and hope, not fundamentals. Under Armour stock now trades at more than 130 times forward earnings, which puts it in the Netflix and Amazon valuation stratosphere … yet revenue growth was just 4% last quarter. Domestic revenues are still falling, and international revenue growth is decelerating. Gross margins are also still in retreat.
Thus, this hype in Under Armour stock should die down soon, and a correction back to $20 and lower is likely.
Top Stocks of 2018 No. 4: XL Group (XL)
Performance YTD: 60%
How It Got Here: This is an acquisition rally. In early march, AXA agreed to buy XL Group Ltd (NYSE:XL) for roughly $57.60 per share.
Where It’s Going Next: XL Group stock presently trades around $56. That means there isn’t much upside to the $57.60 proposed takeover price.
That means upside looks rather limited for the remainder of the year.
Top Stocks of 2018 No. 5: Macy’s (M)
Performance YTD: 58%
How It Got Here: The retail apocalypse is over, as brick-and-mortar footprint reductions appear to be in the rearview mirror while traditional retailers are building out omnichannel capabilities that make them competent competitors in today’s retail world.
At the forefront of this bounce back in retail is Macy’s Inc (NYSE:M), a formerly broken retailer that has reported surprisingly strong numbers recently. Those strong numbers came against an exceptionally depressed valuation, so they have sparked a huge rally in Macy’s stock.
Where It’s Going Next: Comparable sales growth is strongly positive. Margins are improving. And the underlying go-forward fundamentals in retail are dramatically strengthening. Yet, Macy’s stock still trades at just 11-times forward earnings. That multiple seems dirt-cheap for a company with strengthening fundamentals, and as such, Macy’s stock should be a winner through the remainder of 2018.
Top Stocks of 2018 No. 6: Chipotle Mexican Grill (CMG)
Performance YTD: 58%
How It Got Here: Like Tripadvisor and Under Armour, Chipotle Mexican Grill, Inc. (NYSE:CMG) is a 2018 bounce-back story. The underlying numbers are starting to improve, giving credence to the theory that the worst from the E. coli fallout is in the rear-view mirror.
Moreover, the company has a new CEO, one who is knowledgeable about QSR turnarounds (he was the architect of Taco Bell’s recent turnaround). All together, optimism is building regarding the company’s new turnaround growth prospects, and CMG stock is consequently rallying.
Where It’s Going Next: Also much like the Under Armour rally, the Chipotle rally this year seems to be based on hype and hope, not fundamentals. The fundamentals are improving, but not by that much. This is still a low-single-digit comparable sales growth company with big competition in the health space from poke, superfood bowls and a recently revamped McDonald’s Corporation (NYSE:MCD).
But the present 40-times forward earnings multiple seems to overstate the company’s realistic growth prospects. As such, a correction in CMG stock in the back half of 2018 is likely.
Top Stocks of 2018 No. 7: Align Technology (ALGN)
Performance YTD: 55%
How It Got Here: Align Technology, Inc. (NASDAQ:ALGN) has been a secular winner for years now. Five years ago, this was a $35 stock. Now, it’s a $350 stock. The big driver as been a huge consumer shift in the dental industry to what is known as “invisible orthodontics” and “digital dentistry.” Essentially, people don’t like big, chunky braces, and they also want to be smart about their dental care.
Align’s core products — Invisalign clear aligners, iTero Intraoral scanners and OrthoCAD digital services — are the leading products in the invisible orthodontics and digital dentistry spaces. As such, ALGN stock has soared.
Where It’s Going Next: This is a big-moat business with huge top-line growth (40% last quarter) and powerful long-term margin drivers. The valuation, though, does reflect this big-moat and big-growth nature (89 times forward earnings versus 5-year average of 54). As such, while this stock is a long-term winner, the rest of 2018 may be troubled with valuation friction.
Top Stocks of 2018 No. 8: Kohl’s (KSS)
Performance YTD: 44%
How It Got Here: Much like Macy’s, Kohl’s Corporation (NYSE:KSS) is rallying because the retail apocalypse is over. Kohl’s numbers speak to this. Comparable sales growth is strongly positive and improving. Gross margins are rebounding. And earnings are heading higher. These operational improvements, on top of a dirt-cheap valuation, have caused KSS stock to rally big in 2018.
Where It’s Going Next: The fundamentals are improving. By a lot. Comparable sales growth is positive. The company has a powerful partnership with Amazon and a unique value prop in off-price retail.
Gross margins are rebounding. And yet, KSS stock still trades at just 14-times forward earnings. From this perspective, KSS stock doesn’t look done rallying just yet.
Top Stocks of 2018 No. 9: Advanced Micro Devices (AMD)
Performance YTD: 43%
How It Got Here: Chip companies are red-hot, and the hottest this year has been Advanced Micro Devices, Inc. (NASDAQ:AMD). The big 40%-plus rally year-to-date is mostly just a bounce-back, as AMD struggled in 2017 to make a sustainable move higher. But in early 2018, it looks like AMD is gaining market share in critical high-value and big-growth markets like data-centers and AI, and that has pushed AMD stock considerably higher.
Where It’s Going Next: At around $15, AMD stock looks maxed out. Growth is big, and the fundamentals are strong, but the valuation is full. As the company gains market share in certain high-value markets, it will also run into major competition, the likes of which will curtail growth and dampen margin expansion.
Thus, today’s huge growth should not be extrapolated over the next 5 years, and that makes AMD stock look maxed out at $15.
Top Stocks of 2018 No. 10: Adobe (ADBE)
Performance YTD: 43%
How It Got Here: A few years ago, Adobe Systems Incorporated (NASDAQ:ADBE) shifted its business model from one-time installation to recurring subscription software. Consumers were naturally upset, because they were being asked to pay multiple times for something they formerly only paid once for. But that didn’t cause any churn. Instead, everyone adopted Adobe’s cloud subscription service, and the company (and stock) has marched to new highs behind robust revenue growth and huge margin expansion.
Where It’s Going Next: Adobe doesn’t really have any competition in this the professional creative solutions space. Consequently, the company’s presently robust top and bottom line growth rates will persist into the foreseeable future. The stock is expensive trading at nearly 35-times forward earnings.
But for this big of a growth story with a huge moat and powerful long-term margin drivers, that multiple doesn’t seem all that bad. As such, ADBE stock should keep heading higher.
Top Stocks of 2018 No. 11: Red Hat (RHT)
Performance YTD: 42%
How It Got Here: Because the company provides cloud-hosted solutions which help enterprises digitize and modernize their business, Red Hat Inc (NYSE:RHT) has found itself in the middle of a powerful growth narrative supported by secular trends in cloud adoption.
Growth at RHT really started to pick up after the company pivoted into helping corporations build out their own private clouds. After all, the future of the cloud is hybrid (part public, part private). Pivoting into private has allowed Red Hat to dominate a market that was largely untapped before.
Where It’s Going Next: It is tough to see RHT stock heading much higher from here in the near-term. Despite secular growth prospects, revenue growth is running around just 20%. Meanwhile, margins aren’t zooming higher in any material way that implies out-sized profit growth.
Yet, RHT stock trades at 42 times forward earnings. That multiple seems too big for 20% revenue and profit growth.
Top Stocks of 2018 No. 12: Micron Technology (MU)
Performance YTD: 41%
How It Got Here: Chipmaker Micron Technology, Inc. (NASDAQ:MU) finds itself in a golden era for the NAND and DRAM markets. This golden era is characterized by huge demand from end-markets like data-centers, IoT, AI, automation and next-gen gaming, as well as by limited supply due to the complexity of chips involved in those markets. Big demand plus small supply leads to high chip prices, which in turn leads to huge profits for MU.
Where It’s Going Next: Big demand will remain into the foreseeable future as we continue to enter the digital information era, characterized by automation and big data. Supply increases are coming, but not in any big enough way to outstrip demand.
As such, the supply-demand fundamentals will remain favorable for Micron, and this stock, which still trades at just 6 times forward earnings, will head higher.
Top Stocks of 2018 No. 13: Amazon.com (AMZN)
Performance YTD: 40%
How It Got Here: We all know how Amazon got here. The company operates the world’s largest digital commerce business, which has become a staple of modern retail. Amazon is also behind the world’s largest (and still rapidly growing) public cloud business. Meanwhile, the company is building out a substantial offline retail business, enhancing its Amazon-branded retail business and contemplating huge moves into healthcare and logistics.
Where It’s Going Next: Amazon is the ideal case of a stock growing into its valuation. As each year passes, revenue growth remains robust, profits soar and the Amazon stock multiple compresses.
This winning combination will persist so long as Amazon continues to dominate critical secular growth markets. Considering e-retail and cloud are still big-growth markets, Amazon stock still has room to run higher.
Top Stocks of 2018 No. 14: IDEXX Laboratories (IDXX)
Performance YTD: 40%
How It Got Here: Leading veterinary medical equipment company IDEXX Laboratories, Inc. (NASDAQ:IDXX) has reported back-to-back double beat quarters in 2018, the sum of which has underscored strengthening fundamentals in the animal medicine space. Those strengthening fundamentals have been powered by new product launches, implying that IDXX’s medical equipment ecosystem is widening in a favorable manner.
Where It’s Going Next: This has forever been a 10%-plus revenue growth company, and is expected to remain so into the foreseeable future as the fundamentals in animal medicine remain strong. But the forward earnings multiple on IDXX stock is now near 70.
That not only seems big for a 10%-plus revenue growth company, but it is also markedly higher than the five-year average forward multiple of 44. Thus, at these levels, IDXX is a “buyer beware” stock.
Top Stocks of 2018 No. 15: Ralph Lauren (RL)
Performance YTD: 37%
How It Got Here: Here we find yet another retail stock jumping because the retail apocalypse is over. Ralph Lauren Corp (NYSE:RL) has reported multiple double beat quarters in a row, all of which point to improving revenue trends and rebounding margins. RL stock, which came in 2018 well off its 5-year highs, has jumped in a big way as a result.
Where It’s Going Next: As much as I love retail stocks here and now, RL stock seems a bit overvalued for my taste. The stock features a forward earnings multiple in excess of 20, and yet revenue growth is still negative. Granted, that revenue growth should inflect into positive territory soon, and margins are rapidly improving. But all together, this is a 5%-10% earnings growth story, and a >20-times forward multiple seems like too much for 7.5% earnings growth.
Top Stocks of 2018 No. 16: Seagate Technology (STX)
Performance YTD: 35%
How It Got Here: Data storage giant Seagate Technology PLC (NASDAQ:STX) returned to positive revenue growth earlier this year, and that got investors excited.
Investors were also excited about the company’s ownership stake in Ripple, a very popular blockchain company. The valuation at the onset of the year was also quite cheap (8 times forward earnings), so investor excitement surrounding strengthening fundamentals and speculative blockchain growth have catalyzed a huge rally.
Where It’s Going Next: The stock is pretty cheap at 11-times forward earnings. But growth is also rather anemic, and revenue growth is actually expected to fall back into negative territory next year.
As such, this doesn’t really feel like a growth play or a value play. Without growth buyers or value buyers, it is tough to see how STX stock makes a meaningful move higher from here in the near-term.
Top Stocks of 2018 No. 17: F5 Networks (FFIV)
Performance YTD: 35%
How It Got Here: F5 Networks, Inc. (NASDAQ:FFIV) got here by being a leader in the dynamic cyber-security market. Namely, F5 has capitalized on the fact that as enterprises trend towards multi-cloud application services, those enterprises require security and other services across all those different cloud applications. By being at the forefront of this trend, F5 has driven better-than-expected revenue and profit growth in 2018, the sum of which has sparked a big rally in the stock.
Where It’s Going Next: Despite big growth exposure, this isn’t a big growth business. Revenues rose just 3% last quarter, and are expected to rise about 3% per year into the foreseeable future. The valuation is appropriate considering those low growth prospects (16-times forward earnings) and also in-line with its 5-year average. As such, while explosive gains for FFIV stock may be in the rearview mirror, this does look like a steady gainer for the rest of 2018.
Top Stocks of 2018 No. 18: Salesforce.com (CRM)
Performance YTD: 32%
How It Got Here: Cloud giant Salesforce.com, Inc.(NASDAQ:CRM) got here by being at the heart of the cloud and data revolutions. CRM leverages data and analytics to deliver robust cloud solutions to enterprises that want data-driven insights on their customers. The volume of data globally is exploding higher right now, thanks to the mainstream emergence of IoT and a movement among large companies towards big data accumulation and analysis. Moreover, every company around the world is going digital, and that means they are pivoting towards the cloud. Consequently, CRM finds itself in the overlap of two huge secular growth narratives.
Where It’s Going Next: Long-term, this stock will head higher owing to its robust exposure to the cloud and data revolutions.
But near-term, CRM stock seems maxed out due to the stock price having sprinted ahead of fundamentals. Read here for a deeper look.
Top Stocks of 2018 No. 19: Nvidia (NVDA)
Performance YTD: 31%
How It Got Here: The most exciting name in the red-hot semiconductor space has been Nvidia Corporation (NASDAQ:NVDA). Owing to its dominance in high-value, big-growth markets like data-centers, AI and automation, NVDA’s growth rates have been sky-high for the past several quarters. This big growth has been accompanied by healthy margin expansion, the sum of which has catalyzed a 1,000% rally in NVDA stock over the past three years.
Where It’s Going Next: Valuation is a slight concern for NVDA, and should create some near-term volatility in the stock. But Nvidia’s dominance in multiyear growth markets like data-centers, AI and automation means that it is truly at the heart of tomorrow’s biggest growth markets.
Consequently, NVDA stock will head materially higher in a long-term window.
Top Stocks of 2018 No. 20: Intuitive Surgical, Inc. (ISRG)
Performance YTD: 31%
How It Got Here: Medical devices giant Intuitive Surgical, Inc. (NASDAQ:ISRG) is more or less a pure play on the robotic revolution in the operating room. The company’s core da Vinci surgical system — which is essentially a robot — has benefited from robust demand over the past several years as the medical world looks to next-gen technology to improve outcomes from surgical operations. This has powered a strong growth narrative at ISRG characterized by 20% revenue growth and even bigger profit growth.
Where It’s Going Next: ISRG is a medical robot stock to buy and hold for the long-term. With that being said, the valuation looks a bit silly at present levels (48-times forward earnings for what analysts see as less than 15% earnings growth over the next five years).
From this perspective, ISRG stock is due for a sizable pull-back in the near-term due to an overstretched valuation, but that big dip should be viewed as a long-term buying opportunity.
As of this writing, Luke Lango was long M, MCD, MU, AMZN, ADBE, and KSS.