The past three weeks haven't been particularly kind to optimists, with the S&P 500 (SNPINDEX:^GSPC) falling an average of two out of every three sessions. Concerns about the imminent paring back of the Federal Reserve's monetary easing program known as QE3 and what effect that might have on the housing sector, hiring, and consumer spending is proving to be enough of a gray cloud to push the broad-based S&P 500 a tad lower.
But if you look at the bigger picture we've witnessed an incredible run from the S&P 500's lows set in March 2009. Unemployment has fallen, housing has normalized, and consumer confidence is near its highest levels in years. In fact, the S&P 500, even with its three-week swoon, is up 16.2% year to date, which is double the average historical return of 8% that most financial analysts will allude to.
King of the hill
One company that's been instrumental in that rally is streaming content service provider Netflix (NASDAQ:NFLX), whose shareholders have witnessed a dramatic reversal of fortune in 2013. Shares are up, through Thursday, by a whopping 191%, and Netflix has pretty much perched itself atop the S&P 500 as the biggest year-to-date gainer for all but a few trading sessions.
Aiding Netflix's huge run has been a push away from DVDs, which are a slowly eroding business and a strategic move toward streaming content -- especially in overseas markets. In Netflix's latest quarter, the company reported a 26% increase in streaming revenue, with international streaming revenue up 155%. The company is also on pace, based on its most recent quarter of growth, to end this fiscal year with as many as 40 million paying members worldwide. Netflix isn't cheap by any means, but it's worked hard on correcting its previous issues.
Is a coup d'etat on its way?
While Netflix's results and shareholder returns have been impressive, other companies within the S&P 500 have been nipping at Netflix's heels for that elusive top-spot ranking. This has me wondering: Does Netflix have what it takes to continue its run higher, or will another company replace Netflix as the year's biggest gainer within the S&P 500?
Does not compute
Big-box electronics retailer Best Buy (NYSE:BBY), depending on which day you choose to run your comparisons, was topping Netflix as of Thursday's close with a gain of 201% on the year, but it has trailed Netflix for practically all but a handful of days the remainder of the year -- thus why I consider Netflix the name to dethrone here and not Best Buy.
Best Buy had essentially been written off for dead earlier in the year; however, I was one of few investors who had faith in the chain retailer. By focusing on mobile products, smaller store fronts, and empowering its associates to price-match its primary online competitor Amazon.com, Best Buy has been able to reverse a negative trend in EPS and recent surpassed Wall Street's EPS expectations of $0.12 by $0.20! Despite the triple, sales are anticipated to fall nearly 14% this year and remain flat next year as Best Buy reins in costs. Might that be a bit pricey for a company trading at 14 times forward earnings? While I do like the Best Buy long-term story, I'd certainly say so.
A little further back, but nonetheless exhibiting a big gain this year, is memory-chip maker Micron Technology (NASDAQ:MU), which is up 119% through Thursday's close. The company has benefited from both its acquisition of the defunct Elpida memory, which is expected to greatly expand its market share for a bargain-basement purchase price of $2.5 billion (that's not sarcasm, by the way; this really was an incredible deal!), and also noted that cost reductions and demand are improving which is yielding better gross margins.
The one tricky thing about memory-chip makers is that we see this pattern repeat every couple of years. Memory providers are highly cyclical in that they're governed by tech and consumer spending, which is ultimately dependent on the economy and the tech replacement cycle. At the moment, the tech replacement cycle is in full swing, but we've also learned as investors that this won't last forever. Generally speaking, the best time to buy memory-chip makers such as Micron is when no one else wants them. When memory providers are outperforming nearly every other stock, as we're seeing now, is precisely when you should be considering an exit stage left.
Game, set, match
Video-game and gaming accessories retailer GameStop (NYSE:GME), another company expected to be digging its own grave earlier this year, is up 111% year to date following its big second-quarter earnings pop on Thursday.
When the year began, there was speculation that the long-awaited new gaming consoles from Sony and Microsoft would have built-in fail-safes to ensure that used games couldn't be played on either system. That fear has ebbed following news from both companies that approved channel used-game sales will be allowed. That's great news for GameStop, which makes a good chunk of its profit from high-margin used-game sales. In addition, GameStop delivered 121% growth in mobile revenue in its recently released second quarter, proving to investors that it's able to move beyond bricks-and-mortar channel sales.
The question, though, is whether GameStop's big boost on the heels of growing mobile and digital sales is enough to counter the potential revenue decline from store closures and the threat of a full-year same-store sales decline. Given how long it took these console makers to develop the next-generation of consoles (six years), I have to believe that there's a good potential for GameStop to sell off once these consoles become available.
There can be only one
I'll be the first to admit that Netflix's current valuation gives me a big case of indigestion, but it's the only one of these three stocks with genuinely solid results.
Best Buy, Micron, and GameStop have all shown considerable signs of improvement, but their results are simply "less bad" than expected. It's not as if Best Buy is growing its top-line by 10% or GameStop is seeing same-store sales rise by 5%. In actuality, Best Buy's revenue growth is flat-to-down, GameStop's same-store sales comp range for the year is more swayed to contraction than expansion, and Micron has reported four annual losses in the past six years. Netflix is the only company really able to expand its top-line and bottom-line of these four companies without heavy cost-cutting or fear of business cyclicality. As much as it pains me to say this, I don't see any of these three stocks unseating Netflix as the S&P 500's top performer when the clock strikes midnight on Dec. 31.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of, and recommends, Amazon.com and Netflix. It also owns shares of GameStop and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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