This State Is a Hotbed for Top-Performing Stocks

I've observed that more companies with top-performing stocks – such as 3-D printer manufacturer Stratasys (SSYS +0.28%), recreational vehicle maker Polaris (PII +3.54%), and sanitizing-focused Ecolab (ECL +0.33%) – are headquartered in Minnesota than would seem likely by chance.

The average one-year return through Sept. 17 of the 16 S&P 500 companies that call Minnesota home was 42.5% – more than double the index's 18.9% return. Additionally, six of the 53 "Dividend Aristocrats" – around 11% of them – hang their corporate hats (and parkas) in Minnesota.

The Land of 10,000 Lakes makes a great place to fish for top stocks. Here's a look at the performances of three Minnesota catches we'll examine: 

YCharts; data to Sept. 17. 

Stratasys: a big fish in the disruptive 3-D printing sea
Stratasys, a $3.8 billion market-cap company based in Eden Prairie, has been more heavily focused on commercial 3-D printers than its fellow early mover 3D Systems. However, Stratasys' acquisition of MakerBot in June gave it a solid presence in the consumer market. Its growth has largely been organic, partially the result of its 2012 merger with Israel-based Objet. 3D Systems, meanwhile, has grown primarily by gobbling up many smaller players.

Plastics are the primary material used in both company's printers, but metals are currently the hot materials to use. 3D Systems recently acquired Phenix Systems, which manufactures direct metal laser sintering printers. Stratasys' chairman has said the company is interested in expanding its metals capabilities.

Stratasys' estimated EPS growth rates for the next year and the next five years are 37.5% and 30.5%, respectively. Its forward P/E and five-year PEG are 38.3 and 1.7, respectively; its PEG suggests it's more reasonably valued than 3D Systems, which sports a five-year PEG of 2.4.

Additive manufacturing is a disruptive industry that's expected to grow at a 25% or greater annual rate for at least the next six years. I tend to favor Stratasys over 3D Systems given its growth dynamics. That said, 3D Systems has done a good job incorporating acquisitions into its fold. In a previous article, I've explored the idea of investing in a couple of plays to cover several bases. That's still a good tactic. 

Polaris: a recreational vehicle maker with good diversification
I first wrote about Medina-based Polaris last October and called it the best play among the recreational vehicle makers. What I liked most about the company still holds true: It's diversified, sports great numbers, and its customers include the government and military. 

The $8.7 billion market cap company began as a snowmobile manufacturer and expanded into ATVs, motorcycles, and low-speed compact electric vehicles. Seasonality is at play with its quarterly numbers, so here's its 2012 revenue breakdown: 69% off-road vehicles, 9% snowmobiles, 7% on-road vehicles, and 14% parts and garments.

Its 2011 acquisition of Indian Motorcycles, America's first motorcycle company, provides it with a stronger line-up in which to compete with powerhouse Harley-Davidson. In August, Polaris introduced 2014 Indian Chief models, the first models it has completely designed, engineered, and manufactured. Its main competitors in snowmobiles and off-road vehicles are Arctic Cat – a follow Minnesota company – and Honda Motor, respectively. Honda also competes in the motorcycle market. 

Polaris' estimated EPS growth rates for next year and the next five years are 16.8% and 17.5%, respectively. The company regularly beats estimates, so current estimates could prove low. It's reasonably valued on a forward P/E and five-year PEG basis at 20.2 and 1.2, respectively. Net profit margin is a solid 9.9%. Return on equity is a fantastic 49% – and that's not due to debt leverage, as debt to equity is only 0.1. By comparison, Harley's and Arctic Cat's respective returns on equity are 25.5% and 26.8%. Harley has a 2.0 debt to equity ratio, while Arctic Cat has no debt.

Polaris reported net earnings of $338 million over the trailing 12 months, while its operating cash flow was $441 million and free cash flow was $286 million. Free cash flow is solid, given Polaris is largely funding its growth from cash. Free cash flow yield using enterprise value is another good metric. Polaris' 3.4% is in line with Harley's 3.8%, while Arctic Cat's 5.6% is tops. While Arctic Cat had (and has) many positive features, I viewed (and still do) Polaris as a better option for most investors because of Arctic Cat's very high beta and erratic profitability and other metrics. 

Ecolab: cleaning up on cleaning up
Ecolab, a $29 billion market cap company based in St. Paul, provides sanitation, cleaning, and other products and services to the institutional, industrial, and energy markets worldwide.

It's becoming increasingly involved in niches with higher growth potential, largely involving water processing and increasing efficiencies in energy industries. Fellow Fool Selena Maranjian writes that bulls like "its expertise in sanitation and water-use management, and especially its prospects using those talents in rapidly growing developing regions." She also notes that the company "used an acquisition to beef up its position in oilfield chemicals."

Ecolab's estimated EPS growth rates for next year and the next five years are 17.9% and 15.2%, respectively. Net profit margin is a solid 6.9%, while return on equity is a fair 13.7%. Debt to equity is 1.1, middling for this industry. Ecolab doesn't have the longer-term growth potential of Stratasys or Polaris, but it's a solid company with low stock price volatility (it has a beta of 0.5, whereas Stratasys sports a 2.2 and Polaris a 1.7). Its "green" creds, including being recognized for its climate change performance, might appeal to those interested in socially responsible investing. 

Foolish takeaway
Stratasys, Polaris, and Ecolab have been outperformers and look attractive going forward. Stratasys is an early mover in the disruptive 3-D printing industry, Polaris sports a diversified product mix and great metrics, and Ecolab's a solid grower with low stock price volatility.