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There have been two major themes for stock market investors this year: Performance has petered out from last year, and a correction may be on the way.
The S&P 500 Index (.SPX) has returned 7% this year through Thursday. That might seem lousy when compared with the 32% return (with reinvested dividends) during 2013, but it's on pace to beat the historical average by a wide margin. (That's not to say it will, of course.)
The strongest S&P 500 sector this year has been Utilities, up 17%, as a number of large players have agreed to pay significant takeout premiums to enlarge their regulated distribution businesses. Regulated electric and natural gas distribution has been a far safer play than commodity-driven wholesale and trading activities.
The S&P 500 Energy sector is up 13%, with Oil & Gas Equipment and Services rising 28%, Oil & Gas Storage and Transportation up 25% and Oil & Gas Exploration up 22%. We drilled down into the S&P 1500 Composite last week to identify five cheap energy stocks that were lagging sector competitors, while revisiting a previous and more conservative list that has done quite well since being highlighted in early May.
But all is not rosy.
The decision by the Obama administration to lift a four-decade ban on U.S. exports of crude oil is another boost for oil producers, but is a bitter pill for refiners, which have suffered from soft domestic oil prices. The S&P 500 Oil & Gas Refining and Marketing subsector is up only 2% this year.
The weakest S&P 500 sector so far this year has been Retailing, which we explored in depth in 12 bargain-bin stocks to buy low. We also recently considered the potential to make money by taking long positions in heavily shorted stocks, including three retail names.
Then there are the ubiquitous warnings of a coming market correction, which could come true, as the S&P 500 Index continues to set records . For one thing, equity prices have been supported for many years by an expanding money supply thanks to global central banks.
The Federal Reserve plans to finish winding down its "QE3" bond purchases by the end of the year. By the middle of 2015, most economists expect the Fed to make another major policy change, which is to allow the short-term federal funds rate to rise from its current target range of zero to 0.25%, where it has been locked since late 2008. There will be plenty of pressure on equity pries as the central bank begins to trim its bloated balance sheet.
Another thing to consider is price-to-earnings valuation. The S&P 500 trades for 14.8 times aggregate 2015 earnings estimates among analysts polled by FactSet. That's up from a forward P/E ratio of 13.1 a year ago, and the forward P/E for the index hasn't been this high since 2007.
Here are the 10 S&P 500 stocks with the highest total returns so far this year:
|Company||Total return YTD||Total return 2013||Total return 5 years||Forward P/E|
|Newfield Exploration Co. (NFX)||77%||-8%||38%||16.7|
|Nabors Industries Ltd. (NBR)||71%||19%||93%||15.0|
|Forest Laboratories Inc.||67%||70%||296%||21.5|
|Keurig Green Mountain Inc. (GMCR)||60%||83%||547%||30.0|
|Electronic Arts Inc. (EA)||58%||58%||74%||16.3|
|Allergan Inc. (AGN)||54%||21%||274%||25.0|
|Williams Companies Inc. (WMB)||53%||23%||447%||38.1|
|Micron Technology Inc. (MU)||47%||243%||527%||9.2|
|SanDisk Corporation (SNDK)||46%||63%||599%||15.4|
|Pepco Holdings Inc. (POM)||46%||3%||172%||20.9|
Total returns assume dividend are reinvested
Source: FactSet, based on closing prices on June 26,2014
There are three oil and gas names among the top 10. The remarkable increase in U.S. oil and natural gas continues, driving revenue and profit increases for many companies. Rising oil and gas prices have also helped, driven in part by uncertainty in Iraq and Ukraine.
Here's a rundown about each of the 10 best performers among S&P 500 stocks this year:
Newfield Exploration Co. (NFX) is the top S&P 500 performer this year, although it has the worst five-year total return among this group.
The company'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 oil 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.
Nabors Industries Ltd. (NBR) is an oil driller that also provides various services to manage oil wells through their entire life cycles. The shares trade for 15 times the consensus 2015 earnings estimate of $1.93, among analysts polled by FactSet. That's the lowest forward P/E ratio among the 10 winners listed here.
The stock rose 6% Thursday after Nabors announced an agreement to merge its well-completion and production business with C&J Energy Services Inc. (CJES).
Forest Laboratories Inc. is one of two pharmaceutical companies on the top 10 list. The five-year total return for the stock is 296%, which compares with a return of 137% for the S&P 500.
The stock rose 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 a share for a premium of 25%. That sets a floor for the stock, assuming the deal is completed.
Keurig Green Mountain Inc. (GMCR) is up 60% this year, and the stock's stellar five-year return of 547% is second-highest on this list.
Highlights for Keurig this year have included a 10-year agreement with Coca-Cola Co. (KO), 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.
Electronic Arts Inc. (EA) rose 21% on May 7, after the console and mobile game maker reported a 21% increase in cash flow from operations to $281 million. For all of fiscal 2014, which ended March 31, net cash provided by operating activities more than doubled to $712 million, allaying investor fears.
EA also estimated adjusted net revenue for 2015 would grow 2% to $4.10 billion. The company expects, on a GAAP basis, to earn $2.37 a share in 2015, compared with only 3 cents in 2014.
Allergan Inc. (AGN) is the maker of Botox. The stock has been very much "in play" this year, with Valeant Pharmaceuticals International Inc. (VRX) making multiple unsolicited takeout offers.
Allergan continues to resist Valeant's marriage entreaties, and there was speculation over the past week that it could attempt a major acquisition of its own to fend off the advances.
Williams Companies Inc. (WMB) runs natural gas pipelines and also provides various other transportation, development and production services to other companies.
The company on June 15 announced an agreement purchase half of general partner interest in Access Midstream Partners LP (ACMP) and half of limited partner interest in ACMP for $6 billion in cash. After the deal is completed, Williams will own all of the general partner interest in ACMP and half of the LP interest.
The transaction is expected to be completed in the third quarter, after which Williams plans to raise its quarterly dividend to 56 cents from 43 cents. Based on the current payout and Thursday's closing price of $58.10, the shares have a dividend yield of 2.96%.
The deal is being partially funded by a $3 billion common offering that was completed June 23.
Micron Technology Inc. (MU) is up 47% this year and the stock has returned a remarkable 527% over the past five years. The semiconductor manufacturer has the advantage of providing memory in PCs as well as in mobile phones, tablets and other portable devices.
For its fiscal third quarter ended May 29, Micron reported a 72% increase in sales to $3.98 billion, while net income grew to $839 million, or 68 cents a share, from $149 million, or 4 cents.
SanDisk Corp. (SNDK) is the other semiconductor manufacturer on this list, and its stock has been the best performer over the past five years, with a total return of 599%. The company makes memory products for use in a wide variety of consumer and enterprise devices.
The company on June 16 announced a deal to acquire Fusion-io Inc. (FIO) for $1.1 billion in cash, net of cash assumed. SanDisk will make a tender offer of $11.25 a share, a 21% premium to Fusion-io's closing price of $9.28 on June 13. The merger is expected to be completed during the third quarter.
SanDisk CEO Sanjay Mehrotra said in the press release announcing the agreement that the addition of Fusion-io would "accelerate our efforts to enable the flash-transformed data center, helping companies better manage increasingly heavy data workloads at a lower total cost of ownership."
Last among the 10 S&P 500 winners for the first half of 2014 is Pepco Holdings Inc. (POM), an electric utility, which agreed on April 30 to be acquired by Exelon Corp. (EXC) for $27.25 a share, a 24% premium.
Here are the 10 S&P 500 stocks with the worst total returns this year:
|Company||Total return YTD||Total return 2013||Total return 5 years||Forward P/E|
|Coach Inc. (COH)||-38%||4%||39%||16.9|
|Whole Food Markets Inc. (WFM)||-32%||28%||325%||22.5|
|Staples Inc. (SPLS)||-30%||44%||-39%||11.2|
|Bed Bath & Beyond Inc. (BBBY)||-29%||44%||83%||10.6|
|Best Buy Co. (BBY)||-23%||244%||2%||11.7|
|Tractor Supply Co. (TSCO)||-21%||77%||514%||20.0|
|Discovery Communications Inc. (DISCA)||-19%||42%||235%||16.4|
|Amazon Inc. (AMZN)||-18%||59%||288%||105.5|
|Yahoo Inc. (YHOO)||-17%||103%||114%||18.5|
|TJX Companies Inc. (TJX)||-17%||52%||258%||14.9|
Total returns assume dividends are reinvested
Source: FactSet, based on closing prices on June 26, 2014
Retailers are well-represented on this list, but there are a couple of surprises.
Coach Inc. (COH) is the poorest-performing S&P 500 stock this year, declining 28%, after the worst showing among these companies in 2013, when the stock rose only 4%.
At its annual investor and analyst day on June 19, Coach's executives acknowledged that major changes were needed for the designer and retailer of handbags and luxury items to regain its footing. The company said a "transformation plan is focused on a new global branding strategy centered on the concept of defining modern luxury," which includes plenty of efficiency measures. Coach will close roughly 70 stores in North America and record pretax charges of $250 million to $300 million.
Coach in April reported a 7% decline in fiscal third-quarter sales to $1.1 billion, an 11% decline in gross profit to $781 million and a 19% drop in EPS to 68 cents. Severe winter weather in North America took some of the blame, and CEO Victor Luis also said in the earnings release that "sales declined as weakness in our North American women's bag and accessories business continued to offset strong growth in men's, footwear, and robust sales gains in Asian markets and Europe."
The decline in handbag sales — the company's flagship product that has seemed immune to discounting trends — has caused some rethinking at Coach.
Whole Foods Market Inc. (WFM) has had a rough ride this year, but the stock has been a Wall Street favorite, returning 325% over the past five years.
Shares of the premium grocer sank 19% on May 6, after it reported a 10% increase in gross sales for its fiscal second quarter ended April 13. Comparable-store sales were up 4.5%. The problem was that revenue of $3.3 billion fell short of the consensus estimate of $3.4 billion, and earnings were flat at $142 million, or 38 cents a share, while analysts expected EPS of 41 cents.
For many companies, a stock decline like this following an "earnings miss" could be considered nonsense, but Whole Foods trades for 22.5 times the consensus 2015 EPS estimate of $1.73. It is priced as a growth stock, and if sales growth doesn't accelerate, the second half of 2014 could be equally rough.
Staples Inc. (SPLS) is down 30% this year, and it is the only stock among the 20 listed in this article to show a negative return for five years. Even amid such a remarkable recovery for the broad market following the credit crisis, long-term investors don't trust the company's big-box business model.
Staples reported a 3% decline in first-quarter sales to $5.65 billion, with roughly a third of the decrease attributed to store closings and foreign exchange. One piece of good news was 1% growth in commercial sales in North America.
The company is working to "re-merchandise" stores in the U.S. to offer products in "categories beyond office supplies," and is in the middle of a two-year plan to cut annual costs by $500 million.
Bed Bath & Beyond Inc. (BBBY) has an interesting business model of continually providing coupons for percentage or fixed-dollar discounts. And it will accept any coupon, even one that is badly torn and over a year past its expiration date.
There's plenty for consumers to love, but investors aren't happy. The company reported a 2% increase in total sales for its fiscal first quarter ended May 31 to $2.66 billion, reversing the previous quarter's sales decline, which in part reflected the severe winter weather.
Gross profit for the quarter was $1.03 billion, which was 39% of sales, down from a 40% gross profit margin a year earlier. Comparable-store sales were up 0.4%.
Net earnings for the fiscal first quarter were $187.1 million, down 8% from a year earlier, but earnings per share were unchanged at 93 cents, because continued share buybacks lowered the average share count by 7%.
Best Buy Co. (BBY) has the second-lousiest five-year return among the 20 stocks listed here, a rise of only 2%. The stock's 23% decline this year has partially reversed its remarkable comeback in 2013, when the shares more than tripled in value.
The shares have slowly inched back from their 29% plunge Jan. 16, after the company said its "investment" in lower holiday prices during the holiday season had "come with a higher-than-expected cost," and that sales for the nine-week period ended Jan. 4 were down 3%, with comparable-store sales down 1%.
For its fiscal first quarter ended May 3, Best Buy reported a 3% decline in revenue from a year earlier to $9.04 billion, while comparable-store sales were down 1.9%. Online sales were up 29%, continuing their encouraging recent path. But the gross profit margin narrowed to 22.4% from 23.1%.
Earnings from continuing operations before taxes or tax benefits rose to $180 million from $146 million a year earlier. The company had $2.57 billion in cash and equivalents as of May 3, increasing from $1.07 billion a year earlier. During the most recent quarter, cash was boosted by a $281 million tax benefit.
Tractor Supply Co. (TSCO) is down 21% this year, but the "largest rural lifestyle retail store chain in the United States," as it calls itself, has been on a growth tear over the past five years, with a total return of 514%.
Reported numbers for the fiscal first quarter ended March 29 looked very good. Net sales were up 9% from a year earlier to $1.18 billion. Gross profit was up 13% to $396 million, with margins improving.
Net income rose 11% to $48.8 million, while EPS rose 13% to 35 cents, as buybacks reduced the share count slightly.
Discovery Communications Inc. (DISCA) reported a 22% increase in first-quarter revenue to $1.41 billion, but rising expenses mainly from the purchase of 12 television networks last year in Sweden, Denmark and Norway kept net income flat at $230 million, or 66 cents a share.
Amazon.com Inc. (AMZN) isn't valued the same way other stocks are, as you can see on the chart above, with a forward P/E ratio of 105.5. But investors have seemed to be a bit peevish at CEO Jeff Bezos' continual focus on building market share at the expense of significant and consistent profits.
The stock dropped 10% on April 25, when the Seattle-based company estimated it would show a second-quarter net loss ranging from $55 million to $455 million, as the company makes significant investments in its Fire TV service, new warehouses and other projects.
Amazon is looking to use yet another loss-leading product to make another industry transformation with its Fire phone introduced this month.
Yahoo Inc. (YHOO) has pulled back this year after more than doubling during 2013, as CEO Marissa Mayer continued her very public attempt to put the Internet-services pioneer back on a solid growth track.
The company reported a 1% decline in first-quarter revenue to $1.13 billion, yet said it had grown revenue year-over-year for nine straight quarters if payments to other companies to bring traffic to Yahoo websites were excluded. The number of ads sold was up 7% from a year earlier, while paid clicks were up 6%.
But a 28% increase in sales and marketing expenses, as the company rolled out several new products, lowered first-quarter net income to $313.9 million, or 29 cents a share, from $390.3 million, or 35 cents, a year earlier.
Net cash provided by operating activities declined to $139.1 million in the first quarter from $218.7 million a year earlier.
TJX Companies Inc. (TJX) rounds out the list of the 10 biggest S&P 500 losers of 2014, with a decline of 17%, following last year's 53% return.
The off-price retailer reported a 5% increase in net sales for its fiscal first quarter ended May 3, while comparable-store sales rose 1%. The company had previous forecast same-store sales growth ranging from 1% to 2%.
Fiscal first-quarter earnings rose to $454.3 million, or 64 cents, from $452.9 million, or 62 cents, a year earlier.
The severe winter weather was blamed for the relatively weak first-quarter sales results, but CEO Carol Meyrowitz expressed confidence during TJX's earnings call on May 20 that better results were just around the corner: "We entered the second quarter with lean inventories, and we see a marketplace absolutely loaded with buying opportunities for quality-branded merchandise. We are well-positioned to take advantage of these opportunities."