Chesapeake Energy (CHKA.Q), Check Point Software Technologies (CHKP -1.14%), and Exact Sciences (EXAS 0.10%)are very different companies, but one thing that they do share in common is market-beating returns. Here's why these stocks have produced envy-inspiring gains that caught many investors off guard.
Chesapeake is in full flood
Rich Smith (Chesapeake Energy): Once a market darling, then an absolute outcast, Chesapeake Energy stock has turned the corner and become popular again.
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Ten years ago, Chesapeake Energy was riding high on the natural gas boom, fueled by the mammoth gas reserves it had accumulated and the expected high prices that energy markets would pay for that gas. The story soon turned darker, however, as natural gas prices plummeted, leaving Chesapeake Energy stock -- and investors who had bought it -- holding the bag. The company's famed founder, Aubrey McClendon, was first let go, then died in a fiery car crash last year.
Meanwhile, behind the scenes and unnoticed by investors who had perhaps written it off, Chesapeake Energy stock was turning itself around. How?
Over the past three years, Chesapeake Energy has unloaded assets and curtailed capital spending, cutting its debt load by 24% to about $9 billion. Cash production is way down, too, unfortunately, due to lower prices on natural gas. But Chesapeake is dealing with the downturn rationally, first cutting capital expenditures by nearly half between 2012 and 2013 (when McClendon was ousted), then continuing to cut in subsequent years. Today, an energy company that was spending more than $14.7 billion in cash annually as recently as five years ago spent "only" $2.1 billion in 2016 -- and Chesapeake offset half of that spending with asset sales.
The result is that while still unprofitable and still burning cash, Chesapeake has demonstrated new discipline in how it spends investors' capital, and it's positioned itself to profit when energy markets turn back around. The stock has doubled over the past year -- and no one ever saw it coming.
Business as usual
Tim Brugger (Check Point Software): For investors following the data-security sector, Check Point Software may not be the first name that comes to mind. CEO Gil Shwed, unlike his peers, doesn't have a spend-at-all-costs mindset to help push revenue growth at the expense of profitability.
The result of Shwed's more conservative management approach is that Check Point is often overlooked for high-flying providers including Palo Alto Networks and Fortinet, to name a couple. Until recently, both Palo Alto and Fortinet were posting 30%, 40%, and even 50%-plus top-line growth. Of course, spending continued to climb for both Check Point competitors, including mounting losses for Palo Alto and a small earnings-per-share profit in the case of Fortinet.
Check Point's 6% revenue increase last quarter to $487 million and its 7% annual jump in sales to $1.74 billion didn't wow the Street. But thanks in part to Check Point's focus on developing less costly, recurring revenue via its subscription sales -- which climbed 22% last year to $390 million -- annual profit soared 12% to $4.18 per share. Excluding one-time items, 2016 earnings were up 13% to $4.72 per share.
Check Point may lack the pizazz of some of its competitors, but for investors who appreciate steady growth on both the top and bottom lines and the relative stability that comes along with that business model, it still tops the list of winning stocks that may have slipped under the radar.
Improving cancer detection
Todd Campbell (Exact Sciences): Exact Sciences' investors scrambled for the exits in October 2015 when a key task force failed to recommend the company's novel colon cancer screening test. Since then, final guidelines did include Cologuard after all, causing test volume to soar and Exact Sciences shares to triple.
Colon cancer is the second most deadly form of cancer, but if it's caught early, it can be successfully treated. The problem is that too few people follow through with colon cancer screening. According to the American Cancer Society, just 58% of the millions of people between 50 and 75 who should get screened end up doing so.
Cologuard may be changing that statistic. Although a colonoscopy remains the gold standard, many people avoid it because of its cost and invasive nature. Cologuard is far cheaper than a colonoscopy, and it only requires patients to send a stool sample to a lab for evaluation. Those advantages appear to be resonating with patients. Last year, Exact Sciences completed 244,000 tests and reported nearly $100 million in sales. That's a big step up from 2015 when it completed only 104,000 tests and reported just $39.4 million in sales.
Undeniably, Cologuard's growth is impressive, and the company may only be scratching the surface of this $4 billion market, but it could be a bit before Exact Sciences grows into its current valuation. After all, the company lost $169 million last year, and that suggests losses are on tap this year, too. Yet based on this stock's performance last year, losses this year might not matter.
