Investors with the time and the temperament often favor individual stock selection over fund or index investing.  The rationale follows the maxim “there is always a bull market somewhere.”  The close of every trading year provides support for this belief as there are always individual stocks that outperform the overall market by a wide margin.

The Top Ten Performing Stocks of 2014 represent a range of sectors and market capitalisations.  While the ASX managed to eke out an increase of less than 2%, the price increases of the Top Ten range from a low of +68% to a staggering +720%.

Some investors are justifiably sceptical of backward looking price performance, as finding the winners before the fact is no easy task.  However, are last year’s big winners a place to look for potential investments for the future?  

With those two points of view in mind let’s take a look at the Top Ten Performers for 2014 and see if any are merely “one year wonders” or if any have a future as bright as the past.  Here is the table with some analyst growth predictions included.

 

Company

(CODE)

2014 % Change

Market Cap

Sector

Share Price

Forward P/E

P/EG

P/EG

5 Yr Forecast

Earnings Growth

2 Yr Forecast

Liquefied Natural Gas

(LNG)

+720%

$992.7m

Energy

$2.03

Sirtex

Medical

(SRX)

+142%

$1.6b

Biotech

$27.62

34.10

0.85

1.16

+44.4%

Qantas

Airways

(QAN)

+120%

$5.6b

Transport

$2.54

8.19

0.73

1.56

+9.6%

APN News

and Media

(APN)

+98%

$797.5m

Media

$0.775

9.69

-2.0

-4.9%

Northern

Star

Resources

(NST)

+90%

$969.2m

Materials

$1.65

5.89

0.14

0.11

+90.6%

Transfield Services

(TSE)

+83%

$796.6m

Industrial Goods

$1.55

8.18

0.8

2.92

+3%

Vocus Comm.

(VOC)

+83%

$566.2m

Telco

$6.23

18.8

0.91

0.82

+39.1%

Recall Holdings

(REC)

+77%

$2.2b

Business Services

$7.10

25.3

1.87

-3.8%

Caltex

Australia

(CTX)

+70%

$9.2b

Energy

$34.40

18.59

1.53

0.56

+35.7%

Orora Ltd

(ORA)

+68%

$2.38b

Materials

$1.99

0.48

+55.4%

 

The question here is: what’s the probability any of these stocks will continue to shine? In an ideal world many investors would like to see a stock with a Forward P/E under 10; a current and five year forecasted P/EG (Price to Earnings Growth) less than 1.0; and a two year earnings growth forecast of 10% or better.  With those rigid criteria and without any additional analysis, only one stock in the table, Northern Star Resources (NST) passes the test.  However, it is not an ideal world and there are solid numbers from nine of the ten stocks in the table in select measures.  Five of the ten have two year earnings growth in excess of 10%; five have current P/EG’s under one; four have forecasted P/EG’s under 1; and four of the ten have Forward P/E’s under 10.

The big surprise in the table is the top performing stock of 2014 – Liquefied Natural Gas (LNG) – with no earnings estimates on the horizon.  This appears to be a high risk stock where investors are speculating that impressive potential will eventually translate into impressive profitability.  LNG might be considered a “one year wonder” – times 2, as a 10 year price performance chart shows.

The LNG story whetted investor appetites with positive news throughout 2009 about the company’s Fisherman’s Landing LNG Project in Gladstone.  In addition, the company claims to have a processing technology that significantly decreases production costs.  In early 2010 the company announced it had reached a conditional agreement with Arrow Energy to sell the project while maintaining royalty arrangements and the share price started to quake.  The quake widened as Arrow became a takeover target and the agreement with LNG was put on hold.  Despite the emergence of new project partners the share price continued to languish until yet another takeover put the final nail in the Fisherman’s Landing coffin.  LNG put the project on hold while retaining the lease and at year end 2012 surprised the market with the announcement it had acquired an LNG project in the United States.

The share price took off in early 2014 as the company announced it would begin trading in the US, followed by a string of positive announcements on licensing and funding the US project.  In mid-year the company shocked the market again, announcing the acquisition of the Bear Head Landing Project in Canada.  So now investors were looking at a company with three potential LNG facilities plus the unique processing technology.  That was not enough to spare LNG from getting dragged down with the declining price of oil, which is used in pricing long-term LNG agreements.  The share price has dropped close to 30% over the last three months.

Sirtex Medical (SRX) offers a radioactive treatment for liver cancer called SIR-Spheres microspheres.  The medical technology involved is complex but understanding the growth potential is relatively simple.  The company currently has PMA (Pre-Market Approval) for the treatment in the US, the European Union, and here in Australia.  The treatment is already in use, classified as a treatment of last resort.  What that means is that the patient pool for Sirtex’s treatment is currently limited to those for whom traditional chemotherapy or radiation treatments have failed.  

Even with the smaller patient base, the company boasts sales growth for 40 consecutive quarters.  Clinical trials are in progress which would move the treatment to a “standard of care” classification, meaning simply a treatment of first, not last, resort.  The potential of this move has led one fund analyst to speculate that Sirtex could jump to a $100 stock.  The next trial results are expected in March 2015.  Even as a treatment of last resort, this stock will benefit significantly from increasing life spans.  Sirtex is definitely not a one year wonder, as the share price has been gradually rising for the past ten years.  Here is the chart.

Sceptics might say that Qantas Airways (QAN) is running on fumes, as the highly publicised turnaround has yet to return the company to profitability.  However, in the Full Year 2014 Financial results the company announced an anticipated profit before tax in the first half of 2015.  Apparently investors listened to that part of the results and ignored the reported $646 million dollar loss in underlying profit before tax.  The share price did not collapse.  Here is the chart.

Some would argue that Qantas shareholders are reaping the benefits of a collapse in oil prices but the chart shows the share price was already rising before it took off.  As the depth of the decline in oil became more apparent, the share price exploded.  On 8 December Qantas announced to the market it anticipates Half Year 2015 results to reflect an underlying profit before tax between $300 and $350 million.  The analyst consensus rating for QAN is Overweight, with 7 at Buy, 1 at Overweight, 2 at Hold, 1 at Underweight, and 1 at Sell.

A cardinal rule followed by many investors is to look for stocks that could capitalise on long-term societal trends, especially in the early stages.  Healthcare stocks, mobile computing and communication stocks, and some digital media stocks are examples.  One would be hard-pressed to find anything other than a trend away from newspaper and magazine publishing stocks.  Yet APN News and Media, with principal operations in newspaper publishing along with radio stations, has been a “two year” wonder on the ASX.  Here is a two year price chart for APN.

The company has expanded its radio presence and is increasing its digital media and outdoor advertising operations.  APN bought out its Clear Channel radio partner and recently acquired a radio station in Perth.  APN is investing in what it feels are its growth opportunity operations – Radio, Digital, and Outdoor Advertising, but that has led to a high debt load with gearing at about 98% as of the most recent quarter (MRQ).

The story of the meteoric rise of Northern Star Resources (NST) can be summed up in one word – acquisitions.  With the volatility of gold prices, major mining companies looked to shed assets, often at fire sale prices and Northern Star was right there to pick them up.  The added production capacity from buying gold assets from the likes of global players Newmont Mining and Barrick Gold catapulted Northern Star into the position of second largest gold miner in Australia.  NST’s two year earnings growth forecast is staggering; but consider this.  The company’s new mines should result in increasing production six times – from 100k ounces annually to 600k!

Transfield Services (TSE) is broadly diversified both geographically and operationally.  The company provides a wide variety of operations and maintenance services such as drilling, well servicing, and rig manufacturing; as well as project and capital management services.  Industries served include oil and gas, telecommunications, property, infrastructure, transport, and mining.  This is a company in the midst of a turnaround story that has investors buying in; but this is not a company with a solid historical share price performance track record.  Here is a 10 year chart for TSE.

Clearly, this is a company crushed by the GFC that has taken a long time to get back on the road to recovery.  In October 2014 Transfield received a buyout offer from Spanish construction company Ferrovial Servicios, S.A. for $1.95 per share, which was later raised to $2.00 per share.  The Board rejected both proposals as undervaluing the company and announced no further discussions with Ferrovial.  

Vocus Communications (VOC) was the smallest company by market cap to make the Top Ten list.  The company is also relatively new to the ASX, commencing trading in January of 2010.  Vocus is a basically a connectivity operator that serves ISP’s (Internet Service Providers) and telecommunication companies.  The company connects its customer to the Internet through exotic sounding technologies, like Dark Fibre and Pacific IX.  The company made some key acquisitions in 2014, including FX Networks, a fibre optics network in New Zealand; and Amcom, a Western Australia Internet Service and information technology provider to businesses.  Full Year 2014 Financial results were impressive, with a 38% increase in revenue and a 53% rise in underlying net profit after tax.  Connectivity through fibre optic networks is a long term trend that should reward shareholders of Vocus Communications handsomely.  Shareholders who got in at the beginning have seen the price rise more than 1200% in five years.  Here is the chart.

Data management services provider Recall Holdings (REC) was spun off from Brambles Ltd (BXB) on 10 December 2013 and the stock price has risen 60% since that time.  Here is the chart.

Technological innovation in data management solutions might well be the never-ending long term trend.  Today corporate data storage centres are moving to the cloud, and cloud services are an integral part of the services offered by Recall Holdings.  The company helps its customers store, protect, and when necessary, safely destroy physical and digital data. The company’s first Full Year Financials showed a 6.7% revenue increase and a 3.7% increase in underlying profit.  The company’s largest market is the US and Recall must be doing something right as the share price jumped on the news the largest data storage and information management operator in the US, Boston Based Iron Mountain, was interested in acquiring Recall.  The formal proposal came in December, for $7.00 per share, which the Recall Board rejected.  At the time of the offer, REH was trading around $6.40.

Caltex Australia (CTX) refines and distributes crude oil products.  The company operates two refineries and a distribution network of close to 800 retail outlets under multiple brands.  The majority are franchise operations.  In addition Caltex supplies fuel for about 1,100 sites, including about 475 operated by Woolworths.  Despite a calamitous drop following the GFC, the share price is up about 250% over 10 years and has exceeded its pre-GFC price.  Here is the chart.

On 11 December the company issued a profit outlook anticipating an approximate 40% rise in underlying profit for the coming year.  As the price of oil Caltex pays has dropped, its refining margins are expected to improve substantially.

The final stock in the Top Ten List is another spinoff, Orora Ltd (ORA), formerly a part of Amcor Ltd (AMC).  Like its former parent, Orora is in the packaging business, with much of it being custom developed packaging solutions for its customers in North America.  In Australasia the company has four divisions – Beverage, Cartons and Bags, Paper and Recycling, and Fibre Packaging.  The company began trading on the ASX on 18 December 2013 and has yet to report a full year of financial results.  However, the company did report Full Year 2014 pro forma results in August and they pleased investors, with the share price jumping 8% immediately following the release.  Pro-forma earnings allow recently merged or demerged companies to leave out one-time expenses associated with restructuring.  

On 30 October Deutsche Bank reiterated its Buy recommendation on ORA, with a price target of $1.90.  The analyst consensus rating on ORA is Overweight, with 5 at Buy, 5 at Hold, and 1 at Sell.  Packaging is not the kind of business to get investors salivating over future growth, but as mundane as they are, every business needs to package its products.  The two year earnings growth forecast is the second best of the stocks on the list, and this newcomer already has a current dividend yield of 3.3%.  Although the dividend is unfranked, analysts forecast a 15% increase in the dividend over the next two years.

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.