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All Contents © 2019The Kiplinger Washington Editors
By Kathy Kristof, Contributing Editor
| November 1, 2016
Investing in the best-performing stocks during this long bull market was a lot like winning the lottery. With cumulative returns ranging from 1,810% to 9,654%, the 10 hottest members of Standard & Poor’s 500-stock index turned modest investments into vast fortunes.
If you had invested $10,000 in shares of the top performer, General Growth Properties (symbol GGP), in March 2009, you would have suffered through a nail-biting bankruptcy. But had you held tight, your stake would be worth a remarkable $965,400 today. The same investment in Alaska Air Group (ALK) would have netted $181,000—far more than you would have had if you had invested the same sum in Vanguard 500 Index (VFIAX), a mutual fund that tracks the S&P 500.
After such fabulous runs, shareholders need to ask whether it’s time to cash in these lottery-like winnings or continue to hang on—not in hopes of duplicating the results of the past 7½-plus years, but of simply beating the market. To help them decide, and to help those who are thinking about buying these super stocks now, we take a look at the 10 best performers from March 9, 2009, through October 6, 2016, explain what made them shine and assess their prospects.
Stocks are listed in order of performance during the period. Prices and related data are as of October 20. Price-earnings ratios are based on estimated year-ahead earnings
Share price: $26.12
Market capitalization: $23.1 billion
Bull market return: 9,654.6% (83.0% annualized)
Price-earnings ratio: 17
Dividend yield: 3.1%
The business: A real estate investment trust, General Growth invests in and develops shopping malls, earning money by collecting rents and selling developed properties.
What drove the stock: Heavily in debt and unable to repay lenders in a timely manner, General Growth filed for bankruptcy reorganization during the financial crisis. Its stock plunged below 50 cents. But General Growth wasn’t insolvent and, unlike what typically happens when a company files for Chapter 11, shareholders didn’t get wiped out. Once as it was clear that the REIT had real value, the stock began to recover. It soared 811% in 2009 and returned 62% the following year, when General Growth spun off Howard Hughes Corp. (HHC) as it left bankruptcy-court protection. The REIT hired new executives, who have proved to be skilled at keeping its malls full of paying tenants. Shareholders got another little boost in 2012, when the REIT spun off Rouse Properties, which has since gone private. (General Growth’s returns include the value of the Howard Hughes and Rouse spin-offs.)
Outlook: Hold. Rather than price-earnings ratio, REITs are valued on the ratio of price to funds from operations, a measure that adds back depreciation and amortization to a REIT’s earnings. General Growth’s FFO is growing slowly, but the amount easily covers its 20-cents-per-share quarterly dividend rate, which the REIT hiked by 11.8% in June. Still, at 17 times FFO, the stock looks pricey and may need a breather. It yields 3.1%.
Share price: $254.43
Market capitalization: $15.9 billion
Bull market return: 5,594.6% (70.5% annualized)
Price-earnings ratio: 33
Dividend yield: none
The business: Ulta is the largest beauty retailer in the U.S., with 928 stores that sell more than 20,000 products.
What drove the stock: Put simply, Ulta’s stock followed the stunning success of the company. Since 2009, sales have nearly quadrupled, and profits have soared by 14-fold. Business remains robust. Revenues and profits are expected to rise by 22% and 25%, respectively, this year and by 18% and 24% next year. Ulta aims to provide a one-stop-shopping experience for consumers accustomed to schlepping to department stores for high-end cosmetics, drug stores for inexpensive brands and beauty salons for professional care products. Putting all brands together in 10,000-square-foot stores that include beauty salons, consumers can get unbiased recommendations. Ulta’s revitalized e-commerce site is now doing the same online, and it’s growing even more rapidly than Ulta’s stores. Online sales jumped nearly 40% this year, fueled partly by video primers on how to apply makeup and nail polish and fix your hair.
Outlook: Hold. Value Line analyst Andre Costanza says the shares have levitated to “likely unsustainable” levels, but Ulta’s growth has been spectacular and the firm it has been regularly topping analysts’ forecasts.
Share price: $371.24
Market capitalization: $39.1 billion
Bull market return: 3,033.9% (57.6% annualized)
Price-earnings ratio: 26
The business: Rapidly growing biotechnology research and development company that specializes in human growth proteins.
What drove the stock: Like many biotech companies, Regeneron toiled in relative obscurity for two decades while its scientists tested how small proteins that support human growth might be used to cure diseases. The researchers hit pay dirt when Regeneron developed Eylea, which won approval from the Food and Drug Administration in 2011. The drug, which treats a number of conditions that can lead to blindness, now accounts for the bulk of Regeneron’s $2.6 billion in annual product sales, and the company predicts that Eylea sales in the U.S. will continue to grow at a 20% pace for at least the next year. Praluent, which lowers artery-clogging cholesterol and has huge potential, won FDA approval last year. The company has about 15 other medications in the pipeline.
Outlook: Buy. Research-and-development costs may continue to weigh on bottom-line growth, but the company’s long-term potential is great.
Share price: $79.13
Market capitalization: $6.7 billion
Bull market return: 2,646.2% (54.8% annualized)
Price-earnings ratio: 10
The business: Rents and leases construction equipment to both homeowners and commercial users.
What drove the stock: Scandals involving bribery and accounting gimmicks caused United Rental to put itself on the block in 2007. The sale, which promised to pay URI investors $34.50 per share, fell through in November 2007, and by March 2009, the stock was down to $3. Moreover, with the economy sinking, sales cratered in 2008, 2009 and 2010, and the company reported big losses each year. But business began to recover in 2011, and United Rentals reported record sales and profits last year. The stock, though, hasn’t been so consistent. It dropped 64% from September 2014 through last February, and has since jumped 74%. A slowdown in equipment rentals in the oil patch has analysts expecting flat to slightly diminished 2016 results and tepid earnings growth in 2017. In the long run, Value Line analyst Nils C. Van Liew says, the company stands to benefit from a growing trend of heavy-equipment users renting, rather than owning, machinery.
Outlook:Buy. Weak demand will likely weigh on the stock for the coming year. But the valuation is compelling, and the shares are likely to recover when energy exploration picks up. Another possible catalyst: Canada plans to launch a massive infrastructure program in 2017.
Share price: $68.65
Market capitalization: $7.5 billion
Bull market return: 2,396.9% (52.9% annualized)
Price-earnings ratio: 11
Dividend yield: 2.9%
The business: Owns and manages hotel and time-share properties.
What drove the stock: Like General Growth, Wyndam saw its shares skyrocket during the bull market partly because of how badly they had performed earlier. With the stock down 90% during the 2007-09 bear market, it was primed to bounce with any good news about the economy, which is arguably the most important force affecting the health of the hospitality and leisure industry. And Wyndham is more economically sensitive than most because about half of its sales and earnings come from sales of time-shares—big-ticket luxury purchases that can be easily postponed. Once the economy sprang back to life following the Great Recession, Wyndam’s stock bolted ahead. Sales and profits followed suit a few years later, giving investors further reason to keep buying the shares. Though profits were nicked by exposure to crashing South American currencies last year, Value Line analyst Simon Shnayder thinks the company’s aggressive international expansion is a long-term plus.
Outlook: Buy. The stock, which has retreated 27% since it peaked at $94 in March 2015, sells for just 11 times earnings, well below the overall market’s P/E of 17. Morningstar analyst Dan Wasiolek thinks the stock is worth $76 per share.
Share price: $38.41
Market capitalization: $16.8 billion
Bull market return: 2,332.1% (52.4% annualized)
Price-earnings ratio: 49
The business: Manufactures sports clothing and shoes.
What drove the stock: Launched in 1996 by a former University of Maryland football player tired of coping with sweat-drenched cotton t-shirts, CEO Kevin Plank developed synthetic t-shirts that pull moisture away from your body. One year later, he developed another fabric to hold in heat; and then a compression suit that could help your body recover from a tough workout. The athletic gear proved to be so popular that sales continued to soar all the way through the Great Recession, helping the stock deliver double-digit-percentage gains every year between 2009 and 2015. However, the stock hit an air pocket last year, as investors grew concerned about a possible loss of market share and lower average selling prices for Under Armour’s products, as well as the stock’s high valuation. The shares fell again last spring due to worries about declining demand for women’s apparel.
Outlook: Sell. Although Under Armour remains a great company with marvelous products, the stock is richly valued even based on optimistic expectations for the future. “A miscue on any front could be disastrous,” says Value Line analyst Costanza.
Share price: $75.29
Market capitalization: $9.2 billion
Bull market return: 1,968.5% (49.1% annualized)
Dividend yield: 1.5%
The business: A regional airline with a focus on the West Coast.
What drove the stock: Unlike other airlines that aim to fly worldwide, Alaska’s strategy is to focus on a few key markets on the West Coast, including Los Angeles and San Francisco. Indeed, 61% of its passengers travel into or out of Alaska’s Seattle hub. That makes Alaska sensitive to regional economic problems, but it has largely insulated the airline from the problems international carriers have faced, such as sluggish growth overseas and currency volatility. And that has allowed revenues and profits to rise steadily, with only a minor bit of turbulence in 2008 and 2009. Alaska is now in the process of buying competitor Virgin America, which will give it a stronger presence in the busy Los Angeles, San Francisco and Dallas markets. Low oil prices have also given the airline a lift, cutting fuel costs by 29% this year. Concerns about whether regulators will allow the buyout of Virgin to go through without forcing Alaska to divest important routes have weighed on the stock, which has lost 5.5% so far this year.
Outlook: Buy. Credit Suisse analyst Julie Yates thinks the merger is likely to close and prove positive for earnings, and the recent sell-off has made the price attractive.
Share price: $124.66
Market capitalization: $18.7 billion
Bull market return: 1,944.2% (48.9% annualized)
Price-earnings ratio: 19
Dividend yield: 0.8%
The business: A leading online travel booking agency, Expedia also offers vacation rentals through its HomeAway subsidiary.
What drove the stock: It’s beginning to sound like a familiar refrain: A huge drop during the 2007-09 bear market (down 82%) set the stage for an outsize recovery once the market turned around. Although Expedia saw revenues jump 10% in 2008, the company reported a $2.5 billion loss that year. Since then, Expedia’s revenues have nearly tripled as growing numbers of consumers book travel through Expedia and other websites the company owns, including Trivago and Hotels.com. Unlike Expedia’s chief rival, Priceline (PCLN), which practically mints profits, Expedia’s earnings history has been far more erratic. But Expedia’s purchase of Orbitz in September should boost profits in the coming year.
Outlook: Hold. The long-term potential is bright, but folding Orbitz into the Expedia clan could cause short-term hiccups.
Share price: $72.24
Market capitalization: $20.6 billion
Bull market return: 1,811.7% (47.6% annualized)
Price-earnings ratio: 18
Dividend yield: 3.3%
The business: Sells intimate apparel, clothing and beauty products.
What drove the stock: Even before the Great Recession, L Brands was suffering from slowing sales at Victoria’s Secret and poor performance at its Limited and Express stores. Arguing that the company needed tighter focus, it sold a majority of Limited and Express to private-equity firms in 2007. That reduced the company’s store count by about one-quarter and its profits by two-third, and it left Victoria’s Secret and Bath & Body Works as the main businesses. With the stock down 80% from its 2006 high by the time the bear market ended, even modest improvements in sales and earnings could fuel the shares. And because little luxuries play well in a tepid economy, L Brands’ numbers did improve, with profits jumping sixfold since the fiscal year that ended in January 2009. But now, new competitors are pressuring L Brands, particularly the Victoria’s Secret products, and growth has slowed to a crawl. Promotions are also hurting earnings, which analysts expect will be down 4% in the current fiscal year.
Outlook: Hold. Investor worries about the fickle nature of fashion have sent the shares tumbling this year, enhancing the stock’s long-term potential. But L Brands’ future hinges on overseas expansion and e-commerce growth that have yet to materialize.
Share price: $123.35
Market capitalization: $52.9 billion
Bull market return: 1,810.4% (47.6% annualized)
Price-earnings ratio: 142
The business: Subscription video-streaming service and producer of movies and television shows.
What drove the stock: Netflix may be the perfect Halloween-themed stock, with the bold moves of CEO Reed Hastings alternately terrifying and tickling investors. Once mainly a provider of movies by mail, Netflix terrified investors by spending a fortune on the technology to provide live streaming of movies and television shows in 2007. The gamble paid off big, lowering the cost of delivering content while improving customer service. In 2008, when the S&P 500 plunged 37%, Netflix was one of the few stocks to make money, rising by 12%. However, that was just the first investor terror-to-triumph ride. Whether investing to expand internationally, raising subscriber rates or spending on independent programing, the stock plunges with each hint of trouble, only to rebound vigorously when the gambles pay off. For example, worries about tepid subscriber growth slammed the stock early this year, but the shares soared 19% on October 18 after Netflix released third-quarter results that showed subscribers coming back.
Outlook: Hold. This company can be a great long-term investment for those with the stomach for extreme volatility, but it is best to hop on this rollercoaster on dips. Though the stock looked reasonably valued earlier this year, it’s uncomfortably expensive at today’s price.