With 9 Months Down, These Are the Best Stocks of 2011

Last Friday, on the final day of the third quarter, stocks dropped heavily. The losses finished off what was the worst-performing quarter for the S&P 500 (down 14%) and Nasdaq (down 13%) since the fourth quarter of 2008. Good riddance.

For the year, the S&P has lost 10% of its value. The European mess gets most of the blame, but nervousness over economic growth has made headlines, too.

But far away from those concerns stands a group of stocks that have been on fire.

The best of the best
Of all stocks trading on major U.S. exchanges and trading for at least $1.50 a share (to screen out penny stocks) on Jan. 1, 2011, Pharmasset (Nasdaq: VRUS) is the biggest winner through three quarters.

Pharmasset is a clinical-stage pharma company with a focus on treating the hepatitis C virus via oral therapeutics. Since the beginning of the year, the company has received fast-track status from the FDA for one of its hepatitis C drugs, entered into a clinical collaboration agreement with Bristol-Myers Squibb (NYSE: BMY), and split its stock.

The second-best-performing stock in all the U.S. exchanges is Icagen (Nasdaq: ICGN), whose 238% gain this year came due to speculation followed by confirmation that Pfizer is buying the drug development company.

Let's look at the list of superstar stocks through three quarters:

Returns through Sept. 30. CAPS rating out of five stars. Analyst data from Capital IQ, a division of Standard & Poor's.

Though the year isn't over -- and this list may well look different in three months -- there are some quick lessons to draw from this data:

• I'd accuse analysts of recommending stocks after they've gone on massive run-ups if not for the fact that analysts almost never issue sell ratings. The overwhelming majority of Wall Street analyst ratings can be classified into strong buy, buy, or hold. So consider that fourth column above a reminder that analysts will almost always recommend some degree of buying.
• Pharmasset: Pharmasset has had some clear victories this year, but the company has never turned a profit -- in fact, its losses have only gotten larger over the years. Though that's not unusual for a development-stage biotech company, investors -- particularly those who don't know the science well or don't have the time to fully grasp the risks -- should be cautious with biotech stocks.
• Green Mountain Coffee: Growth investing takes guts. One of the signs Motley Fool co-founder David Gardner looks for in a growth stock is that the financial media has declared it "overvalued." Green Mountain has been called overvalued over and over and over again -- by Barron's, and even by Fool.com contributors. The short interest on the stock has been creeping up this year and now stands at 10% of shares outstanding. I'm not sure who will be right about Green Mountain from today forward, but I do know I'll be watching from the sidelines.
• Cabot Oil & Gas: Researching this column intrigued me enough about Cabot to add it to my personal watchlist. Cabot has been firing on all cylinders of late -- and the stock has followed suit, popping 10% or more on three separate trading days in 2011. The company is a leading player in the natural gas space, and has had strong production in the Marcellus Shale.
• IBM: This company continues to impress. I'd never bet against Big Blue.

Superlatives like the "best of 2011" list above are fun and instructive. But remember what any mutual fund TV commercial will always tell you: Past performance is no guarantee of future success. If it's forward-looking stock recommendations you're looking for, I encourage you to download an exclusive growth-stock report written by Motley Fool analysts. Just click here for a free copy of the new research report.

And if you own one of the stocks in the table above: well done.