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3 Stocks That Have Tripled This Year

Suppose you look at some basic numbers on a stock ticker and find plenty of promising signs. Sales and profits are growing quickly and the company’s managers earn an excellent return on the capital they invest. The stock ticker’s valuation is a touch higher than you’d like, but still reasonable considering the company’s growth potential. You like everything you see—until you realize that the stock ticker price has more than doubled since January.

Which should you do?

1) Disregard the stock ticker, since you already missed out on the big gains.
2) Favor the stock ticker even more, since it has plenty of momentum.
3) Keep the stock ticker in mind, but wait for a pullback.
4) The answer depends on the type of stock ticker, and the state of the broad market.

No. 3 might sound like the best choice, but the evidence says No. 2 is better. Personally, I’d keep No. 4 in mind, too.

A landmark study on momentum investing published in 1993 showed that stock tickers that have recently soared tend to continue beating the market. A follow-up study nearly a decade later documented something called long-term reversals; a basket of stock tickers with stellar recent returns indeed tends to continue outperforming, but only for a few years, after which it tends to lag. Finally, a 2004 study pointed to a stock ticker’s closeness to its 52-week-high price as being a better gauge of momentum than past-year performance. A stock ticker that’s up 80% over the past year might have initially climbed 120% and then backed off, suggesting the momentum has cooled. A stock ticker that’s hitting new highs is still hot. Perhaps for that reason, the study found that a basket of stock tickers hitting new highs tends to keep outperforming for longer—more than five years.

So recent, impressive gains are a good sign, even if you missed out on them. But don’t just chase highfliers. Plenty of signs matter more than momentum, like valuation. Also, the type of company matters. A few stock tickers are up big this year because of impressive growth. Many top gainers, though, are companies that recently approached financial collapse only to narrowly escape—for now. Those can’t quite be called momentum stock tickers. Finally, while pundits love to argue over whether growth stock tickers beat value stock tickers and vice versa, it mostly depends on the market. Popular growth stock tickers usually outperform in a rising market, and value stock tickers tend to win in down markets (the past year being a notable exception). If you suspect the market is headed for a tumble, stay away from stock tickers that have recently soared.

Below are three stock tickers that have more than doubled in price this year, but which still seem reasonably priced.

Western Digital

YTD price gain: 218%
Forward P/E: 11

Hard-drive maker Western Digital (WDC) sells for more than $36 a share today, up from less than $12 at the end of last year. If that sounds worrisome, consider a few things that should give investors comfort. Hard-drive inventories look lean at the moment, and while prices have fallen over the past year, Western Digital in its most recent quarter shipped 14% more drives than a year earlier. The company sits on net cash equal to 16% of its stock ticker market value, and generates close to 10% of its value in free cash each year. And shares, even after their run, sell for less than 11 times earnings, a discount of some 40% to the broad market.

RF Micro Devices

YTD price gain: 630%
Forward P/E: 18

Having cut costs and trimmed underperforming units over the past year, RF Micro (RFMD) today is financially stable and focused on its core business: making the tiny radios that cellphones use to carry calls and fetch data. The company might be on the verge of a profit jump. The rise of 3G (third-generation) phones has brought not just a change in radios but demand for more of them. A typical “smart” phone, for example, is designed to be backward-compatible with 2G technology, to operate on several frequency bands and to handle Wi-Fi and Bluetooth signals. As all phones gradually become smart phones, RF is positioned to profit, and to diversify its revenue mix away from handset maker Nokia (NOK), which in the past has contributed more than half of the company’s sales.


YTD price gain: 501%
Forward P/E: 13

I can’t quite understand how a liter of water can come to sell for twice as much as two liters of carbonated water mixed with sugar, flavoring and dye. Whatever the reason, soda doesn’t seem to carry much pricing power. And yet, Coca-Cola (KO) manages to turn more than a quarter of each sales dollar into operating profit. Toronto-based soda maker Cott (COT) is nowhere near as successful, but it’s improving after a long slump. By reducing costs the company returned to profitability this year, and operating margin recently jumped from 3% to 9%. Cott makes RC Cola, having bought the brand in 2001, but mostly it makes private-label soda for stores. Management has far exceeded Wall Street’s earnings forecasts of late. If the operational momentum continues, expect the stock ticker to follow. Relative to company sales, Cott shares are still discounted to Coke by more than 90%.

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