2017's top gainers may be in trouble next year
It happens most years. The previous year's big winners in the stock market sink in January.
This tax-driven reversal of fortunes may be especially acute in 2018. A tax cut looks possible, maybe probable. So, many investors are holding onto their winners, itching to dump them in the new year when tax rates could be lower.
That's why the big gainers of 2017 may be in trouble once the New Year's horn has tooted. Here are the five biggest winners year-to-date through Nov. 3, among the 500 stocks in the Standard & Poor's 500 Index.
Align Technology Inc. (ALGN), based in San Jose, Calif., makes equipment for straightening teeth without using traditional braces. The company's clear aligners have been well received by dentists, and by patients who don't like the wired look.
In the five years through Nov. 3, Align shares have returned 829 percent, compared to 103 percent for the S&P 500. However, the long climb has left this stock at a dangerously high valuation.
To buy Align shares today, you must pay 73 times earnings, 16 times book value (corporate net worth per share), and 15 times sales.
Eleven Wall Street analysts cover Align, and every single one of them rates it a buy. The company is debt free, and it earned a 25 percent return on stockholders' equity last year, which is sparkling. But would I own it? No way.
NRG Energy Inc. (NRG) is a collection of companies, many of which were part of Houston Lighting & Power before it was split up in 2003. Its biggest operations are wholesale power generation and delivery of electricity to homes and businesses. It owns about 85 power plants.
This year's 125 percent gain reflects improving earnings (actually, diminishing losses), but the company's financial situation appears quite weak. It has 75 loans and bond issues outstanding, amounting to more than $14 billion. It is paying close to $1 billion a year in interest.
Based in Boston, Vertex Pharmaceuticals Inc. (VRTX) is a biotechnology company. Its stock has doubled this year because of striking success for its family of cystic fibrosis drugs.
Vulnerable because it doesn't have a broad line of commercially successful drug, Vertex hopes that sales of the cystic fibrosis drugs will continue to grow, and not be run over by competitors as its hepatitis C drug was a few years ago.
Meanwhile, the stock appears to be riding a wave of euphoria. Of 28 analysts who follow Vertex, 23 rate it a buy. The stock fetches 76 times earnings, 21 times book value and 16 times sales. There's a phrase for such valuations: “Priced for perfection.” If something goes wrong, look out below.
Micron Technology Inc. (MU) is a semiconductor company based in Boise, Idaho, of all places. It was backed in its early years by potato king J.R. Simplot, who died in 2008.
Micron is one of the most volatile semiconductor stocks. It rose 95 percent in 1998, 300 percent in 2009, 243 percent in 2013 and 99 percent so far this year. On the other hand, it plunged 69 percent in 2002, 64 percent in 2008 and 60 percent in 2015. Remember that a 50 percent drop obviates a 100 percent advance.
As recently as 2015, investors thought that Micron was too tied to the personal computer market, and not strong enough in chips for mobile devices. It seems to have overcome that hurdle.
After rising 99 percent this year, Micron may suffer a January jolt. But at 9 times earnings and 2.6 times book value, I think it is sensibly priced and should do well in the full year 2018.
A leader in “etch” within the semiconductor industry, Lam Research Inc. (LRCX) makes equipment that creates the microscopic grooves to house semiconductor circuits. I expect Lam shares to be hurt in January as investors discard some of last year's winners, but I think it is worth holding.
I expect the semiconductor industry to remain strong in 2018. Moreover, Lam seems to me to be more reasonably valued than Align, NRG or Micron.
It sells for 19 times recent earnings and 14 times the earnings analysts expect for fiscal 2018 (ending in June of next year). That's hardly exorbitant for a company that has grown its book value at almost a 16 percent pace for the past decade.
Disclosure: I own Lam Research shares personally and for most of my clients. I have no positions in the four other stocks discussed in this column, but am considering selling NRG Energy short (betting on a decline), and might have done so by the time you read this.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Mass., and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at email@example.com.