The stock market – as proxied by the S&P 500 – had a strong month in February, returning 4%. As always, however, there were some big winners and big losers. Let's focus on the big winners here.
The three S&P 500 stocks with the best total returns in February were high-performance materials and engineered products manufacturer Arconic (NYSE:HWM), pediatric nutrition leader Mead Johnson Nutrition (NYSE:MJN), and asset-management company Legg Mason (NYSE:LM).
Data by YCharts.
Arconic: Optimism about the Alcoa separation and Trump
Arconic is a new name but has old roots. It was formerly part of aluminum industry pioneer Alcoa, before being renamed and spinning off the legacy upstream business last November into a new entity, which kept the old name of Alcoa -- but replaced "Inc." with "Corporation."
Arconic provides high-performance materials and engineered products to the aerospace, automotive, and other growth industries. The company includes the three business segments that formerly comprised Alcoa's value-added portfolio: global rolled products, engineered products and solutions, and transportation and construction solutions. Arconic also owns a 19.9% stake in Alcoa Corporation.
Arconic stock's total return of 26.7% in February can probably be largely attributed to optimism that the separation of Alcoa Inc. into two companies will unleash value for shareholders in each of the companies, as well as to the so-called "Trump Effect," or the rally in the stock market since November, when Donald Trump was elected president of the United States. There's a belief among some investors that Trump will enact policies that will rev up industrial production and give a leg up to U.S. companies competing in what's now a global market.
In the fourth quarter of 2016, Arconic's revenue was flat with the prior-year period, while pro forma loss per share widened to $2.88 from $1.64. Excluding one-time items associated with the split of Alcoa Inc., earnings per share came in at $0.12, or just shy of the analyst consensus of $0.13. Investors sent shares soaring on Feb. 1, the day following the earnings release. While there were some bright spots in the release, the market got ahead of itself in my opinion, especially since Arconic's 2017 guidance was lighter than analysts were expecting.
Analysts estimate that Arconic will grow EPS at an average annual rate of 23% over the next five years. At face value, the stock looks potentially attractive, as it's trading at 18.9 times forward earnings. However, there are some big uncertainties. Notably, activist-investor Elliott Management, which owns a 13% stake in Arconic, is advocating a management shakeup, including replacing the CEO.
Mead Johnson Nutrition: Being acquired
Mead Johnson is a leader in pediatric nutrition, with its flagship Enfa line the top infant nutrition brand in the world. It's reportedly the only global company focused primarily on infant and child nutrition. The company's products include everything from formulas for routine feeding to those for various conditions and disorders that require specialized treatment.
The reason for Mead Johnson's robust February performance is simple: On Feb. 10, the company announced that it was being acquired by Reckitt Benckiser Group, the world's leading consumer health and hygiene company. RB's portfolio includes such well-known brands as Clearasil, Lysol, Calgon, and Woolite. The deal is expected to close in the third quarter and is subject to the usual regulatory and shareholder approvals.
Mead Johnson's stock popped considerably before the buyout was announced. Some investors bought on the rumors -- often a risky thing to do, but it paid off in this case. The acquisition price of $90 per share represented a premium of 29% to Mead Johnson's closing price on Feb. 1, before the market speculation of a potential buyout.
Reckitt Benckiser's stock is listed on the London Stock Exchange, though investors can buy it over the counter in the U.S.
Legg Mason: The stock market surge and takeover rumors
Legg Mason is a global asset-management company with $713.8 billion in assets under management (AUM) as of the end of January, up slightly from $710 billion at the end of December. Approximately two-thirds of its AUM are for clients based in the U.S.
Legg Mason stock's 19% total return in February can largely be attributed to the "Trump Effect" -- as previously discussed -- and unspecific buyout rumors. When the stock market rises, so too does the value of equities under management by asset managers, which results in more money in their coffers because they charge fees on the money they manage.
In the grand scheme of things, Legg Mason stock's pop in February barely registers as a blip over the longer term, especially since the stock got clobbered during the global financial crisis of 2007 to 2008. As you can see in the chart below, the stock has been struggling for more than a decade, despite the company's restructuring efforts. By contrast, the stocks of fellow asset managers and S&P 500 constituency companies Invesco and Affiliated Managers Group have performed much better. Invesco's total return has beat the S&P 500 over the time period shown (since January 2006, which is about when Legg Mason's stock peaked), while Affiliated Managers' return doesn't lag the broader market by too much.
I'm not touting these two other asset managers -- it's not a space that I follow closely -- but just pointing out the importance of taking in the big picture.
Personally, I find Arconic the most potentially appealing of these three stocks, given its aim to expand into high-growth areas, including 3D printing. However, given its short history as an independent company, most investors should probably put it on their watch lists rather than diving in now.