Author: Todd Campbell | December 28, 2017
The names you should know
The S&P 500 index's top performers were no match for Bitcoin's meteoric rise in 2017, but some S&P 500 members still generated boast-worthy returns. Did you own any of the market's best-performing stocks in 2017? Here are the 25 stocks that padded investors' pockets the most this year.
1: Align Technology -- up 132%
Metal braces still dominate the market, but Align Technology's Invisalign clear aligners are starting to get used in increasingly complex cases, and that's driving tremendous sales growth. Annualized revenue has more than doubled since 2012, and management thinks sales could reach $2 billion in 2020. In 2017, the company made good headway toward that target. Sales were $1.1 billion through the first nine months of the year, up from $787 million in the same period of 2016. The company's increasingly profitable, too. Net income surged to $221 million in the first nine months from $142 million a year ago. Given its market share is still only about 10%, it's easy to understand why investors made Align Technology this year's best-performing S&P 500 stock.
2. NRG Energy -- up 121%
Once the poster child for how utilities will succeed in the green economy, NRG Energy (NYSE: NRG) shares fell out of favor heading into 2017. In a bid to kick-start shares, NRG's board forced out management, and earlier this year, it announced plans to sell assets and pay down debt. Its strategy includes cutting $1.06 billion in costs, selling between $2.5 billion and $4 billion of assets, and eventually eliminating $13 billion in debt. The restructuring has investors cheering, but it remains to be seen if abandoning renewables and doubling down on fossil fuels will be a savvy long-term decision.
3. First Solar -- up 114%
Potential tariffs had customers flocking to secure access to First Solar's (NASDAQ: FSLR) thin-film solar panels in 2017, and that had investors seeing green. If the U.S. cracks down on Chinese imports, it will be a big win for First Solar, but it may not be entirely clear skies ahead for the company. Competitors are hard at work developing new products that could diminish First Solar's efficiency advantages, and First Solar's transition to its series 6 model could crimp revenue in the short term next year. Nevertheless, any tariff outcome that puts Chinese imports at a disadvantage is good news, and since the company's booked 6.7 GW of panel shipments this year, or about three years worth of current production capacity, it appears First Solar's got all the business it can handle for a while.
4. Vertex Pharmaceuticals -- up 104%
Since late 2016, Vertex Pharmaceuticals' (NASDAQ: VRTX) cystic fibrosis drugs have been approved for use in increasingly more patients, and that growing addressable market translated into significant sales and profit growth in 2017. When it won approval of its first cystic fibrosis drug in 2012, it only addressed patients with one specific gene mutation. Since then, approvals have increased the number of mutations that its drugs can address to 33. Eventually, Vertex Pharmaceuticals thinks its drugs could help about 90% of cystic fibrosis patients. If so, it would be a boon to business. Revenue was up 34% year over year in the third quarter, and as a result, management upped its full-year sales target to at least $2.1 billion from at least $1.9 billion previously. As its drugs get used more and revenue gets leveraged against fixed costs, earnings could expand significantly, and that's undeniably got investors excited.
5. Micron -- up 101%
An increasingly connected world is creating massive demand for Micron's (NASDAQ: MU) memory and flash storage. Management projects industrywide demand for memory from data centers, cloud networks, mobile networks, and client computing will boost DRAM and NAND by 20% and 50% in 2018, respectively. In fiscal Q1, Micron's sales and earnings outpaced industry expectations, fueling speculation that Micron's in a perfect position to profit from that trend. Sales climbed 71% year over year to $6.8 billion in the quarter, and adjusted earnings per share reached $2.45, a sixfold increase from one year ago. Analysts were only looking for sales of $6.4 billion and EPS of $2.19, so people may still be underestimating this company's potential. Having said that, investors ought to be little cautious because, historically, the memory market is prone to both big booms and big busts.
6. Wynn Resorts -- up 94%
A crackdown by China has crimped gambling activity in Macau in recent years, but it appears Macau's bouncing back. After opening Wynn Palace in 2016, Wynn Resorts' (NASDAQ: WYNN) market share has grown to about 14% in Macau, so a recovery there has been very good news for investors this year. In Q3 alone, Wynn Resorts' revenue grew 45.3% to $1.6 billion, and net income hit $80 million, or $0.78 per share. In the future, the company's revenue could benefit from new projects, including a new casino in Boston, Massachusetts, and the potential to build a casino in Japan. Recently, it bought a tract of land in Las Vegas that could allow it to grow there, too. Overall, increasing global wealth is good for casino revenue, but a repeat of 2017's performance will depend on whether or not Macau heats up or cools down from here.
7. Boeing -- up 89%
Boeing (NYSE: BA) came into 2017 with a 3.7% dividend yield that was high enough to make it one of 2017's Dogs of the Dow stocks. Investors who bought shares because of Boeing's high dividend yield ended up making a lot more money from price appreciation than quarterly payments, though. A 7% increase in commercial plane deliveries in the past year contributed to Boeing's soaring share price. A 2.6% year-over-year increase in backlog has helped, too. Boeing's attractiveness, though, likely stems more from its dividend-friendly cash flow than anything else. It increased dividends by 25% in 2014, 20% in 2015, 30% in 2016, and by another 20% in December. At 2.3%, the company's current dividend yield isn't high enough to land it on the Dogs of the Dow list again in 2018, but that yield's still better than the S&P 500's.
8. PayPal Holdings -- up 87%
Retailers are looking for more ways to grow their e-commerce revenue, and one way they're doing that is by offering consumers more flexibility when it comes to payments. In 2017, PayPal's (NASDAQ: PYPL) One Touch helped it capitalize on that trend. One Touch allows users to register devices with PayPal and then purchase goods and services from participating merchants with just one click. Due in part to One Touch's success, PayPal's mobile payment volume surged 54% higher year over year to $40 billion in the third quarter and its total payment volume increased 30% to $114 billion. The company's peer-to-peer platform, Venmo, is also exciting investors. Person-to-Person (P2P) volume grew 47% to $24 billion in the third quarter, and while PayPal isn't monetizing Venmo yet, the potential to do so in the future has fueled interest in PayPal's shares.
9. D.R. Horton -- up 86%
When it came to home sales in 2017, job and wage growth trumped rising interest rates. New home sales hit 10-year highs in October, and in November, sales of new, single-family homes jumped 26.6% year over year. D.R. Horton (NYSE: DHI), the nation's biggest homebuilder, was a big beneficiary of spiking sales and, correspondingly, increasing home prices. For instance, its total net new orders increased 11.8% to 10,333 units, and total closings rose 7.5% to 13,165 in its recently finished fiscal fourth quarter. The company's $3.73 billion backlog value has management thinking revenue will eclipse $15.5 billion in fiscal 2018, up from $14.1 billion in fiscal 2017. If it hits that mark, then 2018 could be a good year for investors, too; despite the threat of higher interest rates.
10. Nvidia -- up 83%
Nvidia's (NASDAQ: NVDA) next-generation graphics processing chips are fueling the development of increasingly realistic and engaging video games, but it's not just video gaming that's benefiting from advances in processing power and speed. In May, Nvidia launched Volta, its next-generation architecture, and data centers eager to better analyze and generate insight from mountains of data will be among the first to deploy it. Nvidia's solutions are also enabling the development of increasingly sophisticated artificial intelligence products across defense, automotive, and the Internet-of-Everything. Growing demand across all of these opportunities drove sales higher this year. For example, gaming sales jumped 25% year over year to $2.64 billion, data center sales grew 20% quarter to quarter to $501 million, and automotive sales grew 13% year over year in the third quarter of 2017 alone.
11. PulteGroup -- up 82%
D.R. Horton (No. 9 on the list) wasn't the only homebuilder to ride a wave of home buying to market-beating returns in 2017; PulteGroup (NYSE: PHM) saw its shares soar, too. Through the first nine months of 2017, PulteGroup's revenue clocked in at $5.8 billion, up from $5.2 billion in 2016, and its earnings per share improved to $1.18 from $0.95. Like D.R. Horton, a big backlog suggests PulteGroup's momentum could carry over into 2018. Net new orders grew 11% in Q3 2017, and its backlog includes 10,823 homes with an average selling price of $431,000, the highest average price in 10 years.
12. Centene Corp. -- up 81%
One of the few health insurers to be expanding its presence on the Obamacare health insurance exchanges, Centene Corp.'s (NYSE: CNC) shares surged last year as acquisitions expanded it into new counties and states. The company still makes most of its money running state Medicaid programs, though, and revenue from that market has climbed significantly following Medicaid expansion in over 30 states. Centene's focus on Medicaid means it makes less in profit per member than peers selling employer-based plans, so its selling, general, and administrative expenses are lower than those of many competing health insurers. Reform that crimps Medicaid enrollment is the company's biggest risk, but that risk has turned out to be the biggest tailwind to its shares in 2017. Efforts to reform Medicaid fell flat in Donald Trump's first full year in office, and that's got investors thinking that any changes to Medicaid that get made won't be as bad as initially feared.
13. Activision Blizzard -- up 79%
Activision Blizzard's (NASDAQ: ATVI) third-quarter sales growth may not look all that exciting, but dig a little deeper into this company's story, and you begin to understand why investors added it to their portfolios in 2017. The company's got 8 one-billion-dollar gaming franchises to its name, and it came into the holiday shopping season marketing new versions of Destiny and Call of Duty, two of its most important titles. Overall, gamers are spending more time playing and consuming video game content, and those are profit-friendly trends. Esports is arguably the next big thing in gaming, and Activision's creating leagues to capitalize on that market. As player engagement builds, interest in competitive gaming climbs, and the company identifies new ways to monetize titles, Activision's in an enviable position to benefit.
14. Alcoa -- up 78%
Spinning off its finished products business (and a pile of debt) in the form of Arconic tied Alcoa (NYSE: AA) more tightly to aluminum prices, and shares have rallied this year as aluminum prices have improved. The company's restructuring was in response to increasing competition from China, which produces more than half of the planet's aluminum. Lately, China's been reining in production, though, and that's making it easier for Alcoa to compete for business. Sure, Alcoa remains a cyclical stock and that makes it risky, but it's in better financial shape than it's been in the past. It's got over $1 billion in cash and closing inefficient plants have made it better able to withstand a downturn. Ultimately, Alcoa's success in 2018 will depend on the direction of aluminum prices (and any changes to tariffs), so investors smart enough to buy and hold Alcoa shares in 2017 will still want to keep close tabs on the commodity market.
15. Lam Research -- up 77%
Calling off its planned merger with KLA Tencor (NASDAQ: KLAC) didn't weigh down Lam Research (NASDAQ: LRCX) investors' optimism in 2017. The semi equipment maker's shares have been on a tear this year as semiconductor demand grows in response to the electrification-of-everything. Memory chip makers, including Micron (No. 5 on this list), are increasing fab capacity to build chips that enable smaller, faster, and better-performing devices, such as mobile phones, wearables, and networking equipment. Growing demand for Lam Research's semiconductor manufacturing equipment has contributed to a nearly doubling in revenue over the past three years, and while Lam Research's sales are historically cyclical, big trends may be reducing the seasonality of its business. If so, then buying Lam Research shares in 2017 will look very smart.
16. Red Hat -- up 76%
The widespread embrace of hybrid clouds that link corporations' private and public networks was one of the biggest trends in networking in 2017, and that's boosted subscriptions to Red Hat's (NYSE: RHT) Linux tools. Its solutions help companies deploy and manage their Linux networks and Red Hat's sales increased 22% year-over-year to $748 million and adjusted earnings increased 20% year over year to $0.73 in the third quarter of 2017, alone. The company's ability to land bigger and bigger deals was also encouraging to investors in 2017. For example, it inked 94 million-dollar deals in Q3, up 30% year over year, and 17 of those contracts were worth $5 million.
17. Intuitive Surgical -- up 72%
Robotic surgery became more fact than science fiction in 2017. Hospitals came into the year relying on surgical robots to assist in prostate and urological procedures, and as the year progressed, robotic surgeries became increasingly more common in other procedures too, including hernia repair. Intuitive Surgical's (NASDAQ: ISRG) da Vinci surgical robot is by far the leader in surgical robots, and because robotic surgery can reduce surgical complications and speed up recovery times, hospitals have installed more than 4,000 da Vincis worldwide. A growing installed base and procedure growth are driving revenue and profitability. In Q3 2017, revenue was 37% higher than it was two years ago, and its third-quarter operating margin of 34.6% is up nicely from the 32.2% reported two years ago.
18. Adobe -- up 70%
People use Adobe's (NASDAQ: ADBE) software to create engaging, compelling content, and like many of its peers, its business is benefiting from a shift from one-off purchases to a subscription-based software-as-a-service (SaaS) model. Rather than relying on customer upgrades for sales, subscriptions offer Adobe a continuous stream of high-margin recurring revenue. In the fiscal year of 2017, SaaS helped sales grow 25% to $7.3 billion, and adjusted net income grow 42% to $4.31 per share. The performance has the company's management targeting fiscal year 2018 sales of $8.7 billion, up 19.5%, and adjusted earnings of $5.50 per share. With that kind of clarity into future growth, investors' confidence in Adobe is understandable.
19. FMC -- up 69%
There are two big reasons investors warmed up to FMC's (NYSE: FMC) shares in 2017. First, the company's decision this year to acquire products from Dupont makes it the fifth biggest player in crop protection. Secondly, demand from battery manufacturers is accelerating profit at FMC's lithium business. The crop protection business should provide plenty of future cash flow, but the lithium business is what I find most interesting. Lithium sales only accounted for 15% of Q3 2017 revenue, yet it was responsible for 24% of the company's earnings. FMC is tripling its production capacity through 2019 to meet demand, and earlier this year, management told investors it plans to spin off its lithium segment as a separate company in 2018. The chance to receive shares in its pure-play lithium company next year is likely a big reason investors added FMC stock to their portfolios in 2017.
20. Illumina Corp. -- up 68%
Illumina Corp.'s (NASDAQ: ILMN) latest gene sequencing machine, NovaSeq, offers researchers an opportunity for greater genetic insight at a lower cost. Researchers use gene sequencing machines to identify gene mutations responsible for disease. They're also used to match patients up with the medicines most likely to help them. Illumina's systems are used to provide individuals with insight into their genetic makeup, such as a person's ancestry, too. NovaSeq is faster, and over time, it could reduce the cost of gene sequencing from $1,000 today to as little as $100. Those advantages led to more machines being installed this year, and as a result, greater demand for Illumina's high-margin consumables. In the first nine months of 2017, revenue increased to $1.97 billion from $1.78 billion in 2016. At the same time, net income improved to $658 million from $339 million. Since gene sequencing is critical to next-generation medicine, and Illumina is the market share leader, it's not surprising this company's shares have been on a roll.
21. CBOE Global Markets -- up 68%
Cboe Global Markets (NASDAQ: CBOE) operates an option and futures exchange and it makes its money by acting as a toll collector, receiving a little bit of every transaction performed on its marketplaces. The company benefits when volume increases and new contracts are issued. In December 2017, the Cboe became the first exchange to launch Bitcoin futures and I'd bet that at least some of Cboe's increasing share price in 2017 was tied to the frenzy of interest in cryptocurrency ahead of that launch. It remains to be seen what the impact of Bitcoin futures may have on Cboe's profitability over time, but the company's already posting solid upside without help from the digital currency. For example, organic revenue grew 15% year over year in Q3 2017, and net profit grew even more quickly, increasing by 25% year over year.
22. Caterpillar -- up 68%
Better-than-expected demand in China and strong construction markets in the U.S. made Caterpillar (NYSE: CAT) one of the S&P 500's top performers in 2017. Caterpillar's equipment sales increased by 13.4% to $30.5 billion in the first nine months, and as a result, management doubled its earnings forecast over the course of the year. As of October, Caterpillar expects full-year sales of $44 billion and adjusted EPS of $6.25. That's a lot better than its forecast for between $36 billion to $39 billion in sales and adjusted EPS of $2.90 at the start of the year. There's no telling what the company's stock will do in 2018, but oil and gas activity remains strong, and mining activity could be perking up. If construction, oil and gas, and mining markets cooperate, then earnings could grow even more in the coming year.
23. Cadence Design Systems -- up 68%
All sorts of products are getting packed with electronics, and making sure everything works correctly requires significant design upfront. In 2017, Cadence Design Systems (NASDAQ: CDNS) rode the smart product wave to significant gains. Companies clamoring for design solutions has resulted in management expecting full-year 2017 sales and non-GAAP earnings per share of at least $1.93 billion and $1.39, respectively. If it can hit those targets, then it would reflect significant growth over the last two years. Revenue was $1.82 billion in 2016 and $1.7 billion in 2015, and EPS was $1.21 in 2016 and $1.09 in 2015. No wonder investors were cheering the company on in 2017.
24. The Estee Lauder Companies -- up 67%
This year has been a great one for pure-play beauty consumer goods company Estee Lauder (NYSE: EL). The $12 billion per year company sells high-end cosmetics and beauty products in more than 150 countries, and global income growth is supporting sales of prestige beauty care products, such as Estee Lauder's Tom Ford brand. While department stores are struggling, Estee Lauder's online and travel retail sales are growing by double-digits. in its fiscal quarter ending September 30, mid-to-high teens growth outside of the Americas was responsible for net sales growing 14% year over year to $3.27 billion. The strong performance prompted management to bump up its fiscal 2018 sales and EPS growth targets to at least 8% and 12%, respectively, and as long as wages are climbing globally, Estee Lauder's good fortunes should continue.
25. Avery Dennison -- up 62%
The global packaging industry is forecast to grow at a compounded annual growth rate of 3.5% through 2020, but Avery Dennison (NYSE: AVY) is outpacing that growth thanks to acquisitions and rising demand for RFID tags that are used by companies, including retailers, to track products. Avery Dennison's labels, tickets, tags, and other products produced $4.9 billion in sales through the first nine months of 2017, up 7.9% year over year, and net income of $341 million grew 32% in the period. In Q3, sales increased 10%, and adjusted EPS grew 25%. For the full year, management forecasts 8% net sales growth and over a 20% increase in earnings. The company's used rising sales to increase dividends in each of the past six years, including a 10% increase in 2017.
Avery Dennison shares in common key traits of many of the companies on this best stocks of 2017 list: growth. It can be hard figuring out what stocks may lead or lag in any short period of time, but as this list demonstrates, focusing on companies focused on growth is a great way to improve your chances of owning winners.
Todd Campbell owns shares of Adobe Systems, Align Technology, Nvidia, and PayPal Holdings. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Activision Blizzard, Align Technology, Illumina, Intuitive Surgical, Nvidia, and PayPal Holdings. The Motley Fool recommends Adobe Systems, Cboe Global Markets, First Solar, and Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.