As the stock-market race enters the final laps for 2018, Abiomed Inc. is the best-performing stock in the Standard & Poor’s 500 Index.
The standings, as of November 2, 2018:
- Abiomed Inc., up 105%
- Advanced Micro Devices, up 97%
- Fortinet Inc., up 66%
- Advance Auto Parts Inc., up 66%
- Chipotle Mexican Grill Inc., up 65%
If you own one of these, congratulations. If you don’t, don’t feel too bad. If you chose all your stocks randomly from within the S&P 500, and you held 20 stocks, your chance of hitting one of these was only about 20%. Your chance of getting all five? That was about one in 16.5 million.
Here’s what I think about each of these red-hot stocks.
Abiomed
Abiomed (ABMD, Financial) makes devices that assist the heart in pumping, or replace the heart’s functions temporarily (during surgery or acute heart failure). The Danvers, Massachusetts, company has grown its revenue 40% a year, on average, the past four fiscal years.
Earnings have grown even faster. No wonder investors are in love with this stock. Analysts are too, awarding it ten “buy” ratings and only one “hold.”
I love what the company does, but I wouldn’t buy the stock. In case you missed my sermon on the past 1,000 Sundays, there is a difference between a good company and a good stock.
Just as the fastest horses in a thoroughbred race must wear the heaviest saddles, so the best-performing companies sell for a higher multiple of earnings per share than typical companies do.
Abiomed sells for 105 times the past four quarters’ earnings. The multiple for a typical stock at the moment is about 19. Good companies deserve to sell for a premium, but I believe this premium is excessive.
Advanced Micro
A close second is Advanced Micro Devices Inc. (AMD, Financial), many people’s favorite semiconductor stock. In size, AMD is a distant second in the industry to Intel Corp. (INTC, Financial), with $5.3 billion in sales last year compared to Intel’s $62.8 billion.
But in the stock market, AMD left Intel in the dust this year, gaining 97% through Friday compared to 4% for Intel. Its fans say that AMD is more innovative in chip design and that its chips are faster. In my view, industry leadership is constantly changing.
My chips (sorry, I couldn’t resist) are on Intel, so far as the stock-market derby is concerned. You can buy Intel shares for about 12 times earnings, versus 61 times earnings for AMD.
What’s more, Intel has a better balance sheet, with debt only about 38% of stockholders’ equity, compared to 228% at rival AMD.
Fortinet
Fortinet Inc. (FTNT, Financial), of Sunnyvale, California, went public in 2009 and the stock has more than quadrupled since. The company provides a variety of network security products, such as anti-virus, firewall, spam filters and intrusion prevention.
Fortinet shares fell 13% on Friday, tempering its outsized gain this year. One analyst said that in its latest earnings report, Fortinet hit a triple when analysts were expecting a home run.
That illustrates one of my central points: Highly regarded stocks must exceed king-sized expectations to advance.
Advance Auto
I recommended Advance Auto Parts Inc. (AAP, Financial) in this column June 6, 2017, partly on the basis of insider buying by CEO Tom Greco and others. The stock fell in the second half of 2017 but has bounced back strongly this year.
I think it’s not a bad buy now, but I’m not excited about it. It’s probably a market performer going forward, in my view.
Chipotle Mexican
I am still kicking myself for not buying Chipotle Mexican Grill Inc. (CMG, Financial) shares late last year, when the stock was reeling because of food poisoning problems at several of its restaurants. That’s the kind of real-but-temporary bad news on which I like to buy.
I never pulled the trigger then. Now -- at $476 a share, which is 57 times recent earnings -- I think the shares are overpriced.
Past Record
This is the sixth column I’ve written on the market’s leaders as the year enters its final stretch. It’s fair to say that I’ve been too harsh on them.
Of the 25 market-leading stocks I’ve discussed in the previous five columns, I’ve recommending avoiding 19. Yet those stocks have marched on to further gains, achieving an average 12-month return of 34%.
There were five stocks that I thought looked promising for further gains, but they as a group have gained only 3% in the ensuing 12 months. The one stock on which I was neutral gained 5%.
I frequently criticize investors who I believe overemphasize momentum as a factor in stock picking. But it looks like I’m guilty of underestimating it.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected].
