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10 best-performing S&P 500 stocks of 2014

There have been many surprises, as M&A heats up and yields decline.

  • By Philip van Doorn,
  • MarketWatch
  • – 06/02/2014
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The S&P 500 Index (.SPX) has returned 5% this year after soaring 32% in 2013, but there have been many surprises for investors, including the fact that two airline companies are among the best performers.

The benchmark index keeps hitting records, as stocks are being supported, in part, by an unexpected drop in interest rates. The yield on 10-year U.S. Treasury notes has declined 42 basis points this year to 2.48%, as investors have continued to snap up U.S. government paper even as the Federal Reserve winds down its monthly bond purchases aimed at keeping rates low.

There are daily warnings that the stock market may be overvalued . That's because the S&P 500 trades for 14.5 times the 2015 consensus earnings estimates, among analysts polled by FactSet. That's up from 13.3 a year ago, and the highest since the pre-crisis days of 2007.

Another sign that we could be at the late stage of a market rally is the vastly increased number of M&A deals this year. There have been 837 transactions involving U.S. and Canadian firms, compared with 220 a year ago, according to FactSet. Hot sectors for deals have included telecommunications and pay television, with AT&T Inc. (T) agreeing in May to purchase DirecTV (DTV) for $48.5 billion and Comcast Corp. (CMCSA) announcing an agreement in February to snap up Time Warner Cable Inc. (TWC) through a $45 billion stock swap.

The strongest S&P 500 subsectors this year include oil & gas equipment and services, which is up 17%; oil & gas exploration and production, up 15%; real estate investment trusts, up 15%; natural gas utilities, up 21%; and electric utilities, which have risen 14%, following large acquisitions announced by Exelon Corp. (EXC) and Berkshire Hathaway Inc (BRK/B).

Following are the 10 S&P 500 stocks with the highest returns, including reinvested dividends, this year through Thursday's market close.

The group is diversified, although there are two airlines among them, as well as two pharmaceutical firms and two companies involved in oil exploration and drilling.

Looking at the top performers won't help you guess which stocks or sectors will outperform for the rest of the year, but the economic, market and M&A trends that have pushed these stocks so high can provide plenty of food for thought:

Forest Laboratories

The top S&P 500 performer so far this year is Forest Laboratories Inc. (FRX), which closed at $95.75 Thursday, for a year-to-date return of 60%, following a 70% advance in 2013. The stock has returned 304% over five years, which compares with a 132% increase for the S&P 500.

The stock popped 28% on Feb. 18 after the company agreed to be acquired by Actavis PLC (ACT) for $25 billion in cash and stock. The deal, when announced, was valued at $89.40, for a premium of 25%.

And then on April 28, Forest Laboratories announced a deal to acquire Furiex Pharmaceuticals Inc. (FURX) for $1.1 billion in cash, which comes to roughly $95 a share, or a 19% premium. But there's another possible sweetener for Furiex's shareholders, consisting of "up to $30 per share (approximately $360 million in aggregate) in a Contingent Value Right (CVR) that may be payable based on the status of eluxadoline, Furiex's lead product, as a controlled drug following approval," according to Forest's deal announcement.

There's a built-in floor to the stock price for Forest Laboratories, assuming the merger with Actavis is approved. But there have been some challenges from investors who were hoping for a higher takeout price, as is typical for large M&A deals. Forest Laboratories last week agreed to disclose additional information about previous merger offers to shareholders.

Nabors Industries

Second-best this year among the S&P 500 is Nabors Industries Ltd. (NBR), which is a contract oil driller headquartered in Bermuda. The company also provides various services to manage oil wells through their entire life cycles. The stock is up 54% this year through Thursday's close at $54.30, following a 19% return last year. The five-year total return is 48%, which is the second-worst performance among the stocks listed here.

The shares trade for 13.5 times the consensus 2015 earnings estimate of $1.94 a share, among analysts polled by FactSet. That is the second-lowest forward price-to-earnings ratio among this year's top 10 S&P 500 stocks. The consensus 2014 EPS estimate is $1.16.

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Nabors reported a 2% decline in first-quarter revenue to $1.59 billion, while net income dropped to $49.9 million, or 17 cents a share, from $99.1 million, or 34 cents, a year earlier. The revenue decline was attributed to expected "weather-induced interruptions," Nabors CEO Tony Petrello said in the company's earnings release.

Jefferies analyst Brad Handler on May 21 upgraded Nabors Industries to "buy" from "hold" on expectations for growing international demand and the "pending" announcement of the company's internal strategic review.

Electronic Arts

Third-best among S&P 500 components this year is Electronic Arts Inc. (EA). The game software developer's stock is up 52% this year through Thursday's close at $34.76, following a 58% increase in 2013. The five-year return is a rather low 51%, when compared with the index.

EA's shares trade for 15.6 times the consensus 2015 EPS estimate of $2.23. Analysts are expecting EPS to grow by 19% from $1.87 this year.

The stock soared 21% on May 7, after the company reported year-over-year declines in fiscal fourth-quarter net revenue and earnings, but a 21% increase in cash flow from operations, to $281 million. For all of fiscal 2014, which ended on March 31, net cash provided by operating activities more than doubled to $712 million.

EA also provided guidance, with adjusted net revenue for 2015 expected to grow 2% to $4.10 billion. The company expects, on a GAAP basis, to earn $2.37 a share in 2015, compared with 3 cents in 2014, but also projected non-GAAP EPS of $1.85, which will reflect a net revenue decline of $275 million, because of a change in the way online gaming revenue is recognized. Fiscal 2014 non-GAAP EPS totaled $1.73.

Keurig Green Mountain

Keurig Green Mountain Inc. (GMCR) ranks fourth, with a total return 50% this year, following a 2013 jump of 83%. The five-year total return is a staggering 511%, and Keurig Green Mountain is one of only two firms on the top 10 list to grow its annual revenue per share for five straight years, according to FactSet.

The stock closed at $112.48 Thursday and trades for 27.8 times the consensus 2015 EPS estimate of $4.04. That's the highest forward P/E ratio among the stocks listed here. The consensus 2014 EPS estimate is $3.76. Sell-side analyst opinion for the stock is cooling, with six of 18 analysts polled by FactSet rating the shares "buy," while eight have "neutral" ratings and one a "sell."

Highlights for Keurig this year have included a 10-year agreement with Coca-Cola Co. (KO), announced on Feb. 5, through which the companies will collaborate on the new Keurig Gold "at-home beverage system." That pushed Keurig's shares up 26% on Feb. 6.

The stock rose 13% on May 8, after Keurig Green Mountain reported a 10% increase in net sales for the 13-week period ended March 29 to $1.1 billion, with an 18% increase in EPS to $1.03.

Newfield Exploration

Ranking fifth this year is Newfield Exploration Co. (NFX) of Woodlands, Texas, which explores, develops and produces oil and natural gas. The stock closed at $36.73 Thursday, up 49% this year, following an 8% decline in 2013. The stock's five-year total return is only 2%, the worst performance among the 10 stocks listed here.

The stock trades for 14.2 times the consensus 2015 EPS estimate of $2.60. That's 34% above the consensus 2014 EPS estimate of $1.94.

Newfiled's first-quarter revenue rose 49% to $553 million, while net income from continuing operations came in at $24 million, or 17 cents a share, improving from a loss of $25 million, or 19 cents, a year earlier. The company recently sold its business in Malaysia, and is in the midst of divesting its operations in China.

Newfield is expanding its operations in the Anadarko Basin in Oklahoma, the Uinta Basin in Utah and the Williston Basin in North Dakota.

Delta Air Lines

Shares of Delta Air Lines Inc. (DAL) are up 47% this year through Thursday's close at $40.14, after more than doubling during 2014. Delta last year rejoined the S&P 500, which was quite a boon for the shares, since so many mutual funds hold portfolios of stocks mirroring the index.

The shares trade for 11.6 times the consensus 2015 EPS estimate of $3.45. That's the lowest forward P/E ratio among the 10 stocks listed here. The consensus 2014 EPS estimate is $2.98.

Delta's first-quarter operating revenue grew 5% to $8.92 billion, while operating expenses were flat, with fuel costs dropping 9%. Excluding special items, net income grew to $281 million, or 33 cents a share, from $85 million, or 10 cents.

Pepco Holdings

Shares of Pepco Holdings Inc. (POM) of Washington, D.C., have risen 47% this year through Thursday's close at $27.66, following a return of just 3% in 2013.

Pepco agreed on April 30 to be acquired by Exelon Corp. for $27.75 a share, which was a 24% premium over the stock's closing price on April 25. This large deal continued the trend for electric utilities to try and grow their regulated energy distribution businesses, because of the more predictable earnings streams provided by municipal contracts.

Allergan

Shares of Allergan Inc. (AGN) have climbed 43% this year, following a 21% return during 2013. The stock closed Thursday at $158.50 and trades for 23.2 times the consensus 2015 EPS estimate of $6.84. The consensus 2014 EPS estimate is $5.69.

Allergan, which makes Botox, said on Friday it would "carefully review" the latest unsolicited takeout offer from Valeant Pharmaceuticals International Inc. (VRX) and Pershing Square, which is expected to be worth $56 billion, or $189 a share, for a 19% premium.

Allergan is one of two companies listed here that have grown annual sales per share for five straight years.

Southwest Airlines

Southwest Airlines Co. (LUV) has jumped 41% this year after soaring 86% in 2013. The shares closed Thursday at $26.44 and trade for 15.2 times the consensus 2015 EPS estimate of $1.74. The consensus 2014 EPS estimate is $1.50.

The company reported a 2% increase in first-quarter operating revenue to $4.17 billion, but operating expenses were down 2% to $3.95 billion, so operating income tripled to $215 million.

First-quarter net income came in at $152 million, or 22 cents a share, increasing from $59 million, or 8 cents, a year earlier. Net cash provided by operating activities in the first quarter totaled $1.12 billion, up 14% from a year earlier. Meanwhile, stock repurchases brought the average count of outstanding shares down 3% from a year earlier.

SanDisk

Rounding out the 10 best stock performers among S&P 500 names is SanDisk Corp. (SNDK) of Milpitas, Calif., which is up 38% this year through Thursday's close at $96.61. The shares trade for 14.5 times the consensus 2015 EPS estimate of $6.65. The consensus 2014 EPS estimate is $6.09.

The stock rose 9% on April 17 after the company reported first-quarter earnings of $269 million, or $1.14 a share, increasing from $166 million, or 68 cents, a year earlier. Revenue grew 13% to $1.51 billion, while gross profit was up 41% to $751 million. The gross profit margin improved to 49.7% from 39.6%, as the company continued rolling out new high-capacity data-storage products for data center and cloud computing use.

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