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All Contents © 2018The Kiplinger Washington Editors
By Dana Blankenhorn
| December 29, 2017
In 2017, it was a very good year. / It was a very good year for tech stocks / And renewable fuels / Builders rose with the tide. / Chips came into their own. / When it was 2017.
With apologies to Ervin Drake (who wrote the original song) and Frank Sinatra (who made it a hit), 2017 was a very, very good year for stocks. As of Dec. 22, the S&P 500 was up 19.9% from its level at the start of the year.
You could form a portfolio by throwing darts at a list of stocks and make money.
But there were some companies that did even better than that. Much better.
It took a lot to make this year's list of the top stocks in the S&P 500. The worst performer in this group delivered returns of 75% to its investors. Two stocks more than doubled, and two others nearly so.
It is a diverse group. None of the so-called FANG stocks—Facebook (FB), Amazon.com (AMZN), Netflix (NFLX) or Google owner Alphabet (GOOG, GOOGL)—made the list, partly because they were already so big that they couldn't easily double in size so quickly.
Instead this year's winners included medical stocks, manufacturers of chips and airplanes, a utility focused on renewable energy and a fintech group co-founded by Elon Musk of Tesla (TSLA).
For these companies it was a very, very, VERY good year. Here are the winners:
Prices and data are from the original InvestorPlace story published on Dec. 22. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
The best stock of the year is Align Technology (ALGN) up 128% since Jan. 1 on prospects for its computer-assisted design approach to the simple problem of straightening teeth.
Align's iTero Interoral Scanner is compatible with several teeth milling systems, used in over 3,000 dental labs. You probably know it best from Invisalign, its clear aligners that slowly move teeth within the mouth, when worn, with less pain and psychological scarring than found with braces.
Align's success as a stock is based on the promise of this technology, more than the results. The company is expected to bring in $1.476 billion for the year, up from $1.08 billion in 2016, delivering $3.67 per share of earnings. This has more than doubled its market cap, to $18.8 billion, and 12 of 13 analysts covering it had the stock on their buy lists, even near the end of the year.
It is teenagers who will drive the next leg up, analysts say. Adults were early adopters of Invisalign, but teens are anxious to get their hands on it, which is why Louis Navellier of Blue Chip Growth wrote in November "it's not too late" to get in.
You may not get another doubling, but you could if a larger company like Pfizer (PFE) sees the global potential and high profitability of pain-free orthidonture, and the end of braces as we know them. A bidding war could send it to the skies and, even without one, business performance should only get better from here.
The best energy play in the first year of the Donald Trump era was NRG Energy (NRG). Ironically, it's a utility, heavy on wind and solar energy. The shares are up 124% for the year while the main oil ETF, the United States Oil Fund LP (USO), was essentially flat.
NRG may be best known for having its name on the Houston Texans stadium in Houston, and assuming it meets estimates for December, it should deliver $10.3 billion on its market cap of $8.55 billion. Profits should come in at about $170 million, 62 cents per share—profits have been nearly unheard-of in Houston since the 2014 oil bust.
NRG is descended from the old Houston Lighting & Power, which was split when Texas deregulated energy in 2003. NRG has since bought both the retail and power generation segments of the company, then bought Green Mountain Energy in 2010 to become the country's largest provider of green power in the U.S.
NRG was built by David Crane, who led the company into green energy before being fired in December 2015, with the company's shares trading in the low teens, a victim of the oil bust and Crane's acquisition of GenOn, which owned a lot of coal-fired power plants and eventually was taken into bankruptcy. Since that low point, the stock is up almost 160% under Mauricio Gutierrez, who had been Crane's chief operating officer.
The inclusion of NRG in this list illustrates one of the key points of this list—that it rewards past failure if you can get past it. NRG shares sold for over $37 at the peak of the shale oil boom in 2014, and was even higher before the Great Recession began in 2008. Its gains in 2017 are partly due to the decision by Gutierrez this summer to sell up to $4 billion in assets, giving GenOn to creditors after it exits bankruptcy and stripping down to what is, essentially, a more conventional utility company.
Don't look for NRG on this list in 2018.
Micron Technology (MU) has more than doubled this year, taking it close to the $50 per share range it reached in November, before falling back.
Another great earnings report did the trick. The company earned $2.45 per share during the quarter on revenues of $6.8 billion, easily outpacing the expected $2.19 per share or earnings and revenue of $6.4 billion.
Micron is in the business of making memory chips, Dynamic Random Access Memory (DRAM) and Flash memory chips, for which demand has exploded as prices have plunged nearer those of hard drives, opening huge opportunities in both mobile devices and cloud data centers.
And Micron isn't a Silicon Valley company. Its home offices are in Boise, Idaho.
Micron has had an up-and-down life, passing $36 per share in 2014 before falling below $10 per share in 2016 and beginning its latest rise. During the hard times, it laid off 3,000 workers. By September 2016 it was back over 31,000 employees.
Micron had over $20 billion in revenue during its fiscal 2017 year, which ended in August, against $12.4 billion in fiscal 2016, and its great first quarter puts it on track to bring in almost $26 billion this year. When at full capacity, as today, it is a profit-making machine, delivering profits of over $5 billion in 2016—and bringing one third of that revenue to the net income line.
Micron was built by the late Steve Appleton, who was CEO from 1994 until dying in a plane crash in 2012. Its CEO since May has been SanDisk co-founder Sanjay Mehrotra, selling it to Western Digital (WDC) for $16 billion in 2016. Mehotra holds over 70 computer memory patents.
Mehotra's first move was to eliminate Lexar, which was selling removable media like thumb drives and camera memory cards, moving that capacity into other markets. A recent InvestorPlace piece on Micron by Nicholas Chahine said investors can buy the shares "with confidence," as demand in its key markets is continuing to grow.
For Vertex Pharmaceuticals (VRTX), 2017 was the year it transformed from a small maker of drugs for rare diseases into a new biotech giant, its stock price gaining 103% to give it a market cap of nearly $38 billion.
It achieved this value without profits, losing over $102 million in its most recent quarter, on revenue of $578 million. Gross profits, however, were $505 million. The loss was due to exploding the research budget, to $455 million from $289 million in the previous quarter.
Its heavy investment has made it the unquestioned leader in the treatment of Cystic Fibrosis, with analysts predicting it will soon be able to treat 90% of sufferers with combination treatments.
What drives speculation of even fatter gains is its work on CRISPR-Cas9 gene-editing technology. I have called CRISPR a sort of "Microsoft Basic" for the emerging world of genetics, in that it can practically treat DNA as a computer programming language, dramatically increasing speed to market. It has rights to license six drugs based on the technology, recently choosing CTX001, a treatment for inherited blood disorders, as its first target. Its next target using CRISPR technology is a drug to treat sickle cell anemia.
Vertex' success with CF and CRISPR has led to speculation it could be bought out in 2018. Deutsche Bank analysts have already set a price, $205 per share, over $50 billion. This for a company that traded at under $30 per share in March 2009, at the start of the present stock market recovery.
Portfolio Grader still considers Vertex a buy based on its healthy sales growth.
Wynn Resorts (WYNN) was the best-performing casino stock in 2017, rising 94% in value through Dec. 22, almost double the gain of nearest rival Caesar's Entertainment Corp (CZR), which owns the Harrah's chain.
CEO Steve Wynn bought his first casino in 1971, but came to prominence in the 1990s with mega-resorts like the Mirage, Treasure Island, the Bellagio and Beau Rivage. Those casinos were part of a hostile takeover in 2000 and the remaining company, MGM Resorts, took Wynn's name upon going public in 2002. If you bought that public offering your gain so far is over 1,500%.
The catalyst for the stock's rise in 2017 is real estate. Wynn Resorts' first big deal was to buy the land on which the Desert Inn stood for $280 million, redeveloping the land as Wynn Las Vegas. The company completed an assemblage of 280 acres on the Las Vegas Strip in December, buying the site of the former New Frontier Hotel for $336 million. The company also owns two large resorts in Macau, China.
Between the September quarter of 2016 and the same quarter in 2017, Wynn revenues rose nearly 50%, from $1.1 billion to $1.6 billion. While it has $10.2 billion in debt against $12.4 billion in assets, it has been slowly paying down the long-term debt, and had over $3 billion in cash and short-term assets at the end of September. This will help it develop both the Las Vegas assets and a new resort-casino in Everett, Mass., near Boston, the Wynn Boston Harbor, due to open in 2019.
While Wynn is now 75, it is the company's potential as a real estate developer that is behind its rise in 2017. It earned less than $80 million on the September quarter's revenue, but the potential of its land assets is enormous. The company thus had a market cap at the end of December of $17.4 billion, and Wynn is worth an estimated $3.4 billion.
Charles Payne called Wynn a "breakout stock in the making" on September 19 and since then it is up over 17%.
If you're playing Las Vegas' future, in short, Wynn Resorts is your best bet right now.
When Elon Musk sold his 11.7% of Paypal (PYPL) to eBay (EBAY) in 2002 for $165 million, he doubtless thought he got a pretty good deal.
It probably was. Musk is now worth an estimated $20.7 billion. But thanks to Paypal's success in 2017, his stake today would be worth over $6.7 billion.
Paypal has risen over 90% during 2017, although the company's business success is much more modest. If it hits its estimated $3.6 billion in revenue for the current quarter, it will finish 2017 with revenue of almost $13 billion, bringing about 15% of that to the bottom line. This would represent a 20% improvement over 2016.
Paypal has benefitted from being a successful play in the "fintech" sector at a time when transaction processors are rising in value. Visa (V) is up almost 45%, and Mastercard (MA) is up 46%.
Paypal benefits from being smaller—a market cap of about $58 billion—and for being an alternative to the payment giants, able to set its own prices and make its own rules. Its units include the Venmo mobile payment system, Xoom for international money transfers and Paypal itself, which does bill paying and money transfers. It recently backed a European savings marketplace called Raisin.
While valuation is starting to become a concern, writes Luke Lango, with the stock selling at a price-to-earnings ratio of 58, Nicholas Chahine recently recommended the stock, writing it has been "kicking hinds and taking names."
My own view is that all of fintech is bubbly right now, as boosters encourage it to buy Square (SQ).
It is unusual to see a large company like Boeing (BA) on this list. It began the year with a market cap of nearly $100 billion, and that kind of serious number is hard to grow. But the stock is up 89% so far in 2017.
Boeing is not growing, on either the top line or the bottom line. But it has friends in Washington who are willing to go to bat for it in trade disputes and shower it with tax breaks.
CEO Dennis Muilenberg has reciprocated by promising increased investment in 2018. In addition to making commercial jets, Boeing is the country's second largest military contractor, with over $14.6 billion in awards, a little over 15% of its business.
In 2017, Boeing was a regular cash flow machine, generating $20 billion in positive operating cash flows during its first three quarters, more than in all of 2016. The company has been rolling out a new jet, the 777, smaller than its old 747 but more fuel efficient. In 2018 it plans to announce another new plane, tentatively called the 797, which will be a mid-market plane like the 737 with the 777's efficiencies.
InvestorPlace writers believe Boeing to be a good company, although I am a little worried about valuation.
It is unusual to find a homebuilder on a list like this, but D.R. Horton (DHI) is not an ordinary homebuilder. Its shares rose 87% so far this year and the company had a market cap of $19 billion by Dec. 15.
Based in Arlington, Texas, D.R. Horton calls itself "America's Builder" and does mortgages and title insurance as well as construction.
Revenues have been growing at a steady 20% clip for several years, reaching $14 billion for the year ending in September. It generally brings about 7% of revenue to the bottom line, and it has been steadily reducing its debt over the last few years, so that at the end of September it represented less than 25% of assets.
Despite its rise during 2018, the stock still sells at less than 19 times earnings, when the average S&P stock sells at over 25 times earnings. Since the start of the economic recovery in 2009, the stock is up over 450%, outperforming the S&P 500 average more than 2:1. Its quick run-up in 2017 has caused a few analysts to downgrade the stock, but strictly on valuation.
The stock has risen against a wall of worry throughout 2017, with Matt McCall of Moneywire writing that "the pressure is on" before a recent earnings call. A few weeks later our former chief technical analyst, Sam Collins, wrote that the stock was "building to the sky," and since then it is up over 50%.
I have a soft spot for Red Hat (RHT). I spent half the last decade covering open source, and Red Hat is the avatar of open source, having offered paid support for its version of Linux for decades. Open-source software is free to use, but vendors can offer paid support. Red Hat calls its free Linux Fedora, and its paid-support version Red Hat Enterprise Linux.
It is not open source per se that landed them on this year's list, with a gain of 76% on the year. It's the cloud. Clouds offer a "virtual" operating system on top of applications, and usually that means Red Hat tools.
The current star of its show is OpenShift, which at first was a way to get applications written with other Red Hat tools into the cloud, but is now offered as a "container" solution. Containers are hot because they segregate applications within a cloud, offering everything the application needs to run, independent of other software.
Red Hat generally brings about 10% of its revenue to the net income line. For the year ending in February, that meant earnings of $253.7 million, $1.39 per share, on revenue of $2.41 billion. For the first three quarters of this year, it had already achieved revenues of $2.15 billion. It has recently made a habit of greatly exceeding analyst estimates on earnings, which has helped drive the stock forward.
Like Micron, Red Hat is also based far from Silicon Valley, in this case in Raleigh, NC, where its headquarters is in the former offices of Progress Energy, which was bought by Duke Energy (DUK) in 2011. CEO Jim Whitehurst has been in place since 2008, having formerly worked for Delta Air Lines (DAL). He has compared the open source and cloud standards to the launch of standard screws and bolts in the early 19th century, which allowed for the mass production of trains, planes and automobiles. He wrote a book about his Red Hat experience in 2015, called "The Open Organization."
With a price-to-earnings ratio of 66, Red Hat stock is very pricey, evidenced by a drop of 4% recently when it beat earnings estimates by almost 20%. In addition to being one of the year's big gainers, Red Hat today is also one of the priciest stocks in the S&P 500. I called its valuation stretched in June.
Since then it's up 24%—what do I know?
Nvidia (NVDA), is the kind of company you expect to see in a list of big gainers.
Nvidia is a chip designer. It focuses on graphics, and its initial niche was in add-in boards for PCs used for video games. But fast processing of graphics data has many other applications as well.
For one thing, it's very useful for mining Bitcoin. For another, it transforms cloud computers into "fog systems," with the raw processing speed necessary for artificial intelligence applications. Fast graphics processing is also essential for self-driving cars, due to be another hot market.
For all these reasons, Nvidia was one of the most talked-about stocks of 2017, rising almost 81% in value to almost $120 billion. That's still barely half the valuation of chip leader Intel (INTC), but five years ago Nvidia was a $12 stock. It currently sells for nearly $200 per share.
Nvidia sales grew 40% during its 2017 fiscal year, which ended in January, to $6.9 billion. It has nearly matched that revenue performance in the first three quarters of its 2017 fiscal year, while steadily increasing margins, meaning 31% of its $2.64 billion in revenue for the quarter ending in October hit the net income line.
Nvidia is a "fab-less" company, which means it mainly designs chips, leaving their manufacture to others. By avoiding the capital costs of manufacturing, it can be very profitable. Nvidia maintains control of its designs through their manufacture and makes sub-system boards as well as chips. Its best-known brand for graphics cards is GeForce. It's not resting on its laurels, making a new play for in microprocessors with a chip dubbed Titan V.
Nvidia may be the most popular stock on this list for InvestorPlace writers, because its market has a long way to grow, thanks to the evolution of cloud into artificial intelligence.
Nvidia will remain unstoppable until Intel delivers graphics chips that are truly competitive with what it offers. That may not be soon.
This article is from Dana Blankenhorn of InvestorPlace. As of this writing, Blankenhorn owned shares in AMZN.
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