Top Stocks of 2014

Stock Market Video

Top Stocks of 2014

This Week’s Fortune Cookie

In Case You Missed It

It shouldn’t be a surprise to anyone who follows equity markets that 2014 wasn’t a fabulous year for growth stocks. While the major market indexes made progress overall, the choppy action and multiple steep corrections caused lots of anxiety, as quick reversals led to defensive sales of stocks that then took off again.

I’ve been doing these Top Stocks of the Year reports for quite a while, and I have a couple of observations about how 2014 stacked up against previous years.

First, 2014’s champions weren’t anywhere near the best stocks of 2013. That’s not surprising, as 2013 was a banner year for growth investors. Just to illustrate, when I wrote the report on the top stocks of 2013, I put my cutoff at 16 stocks that returned over 400% for the year. And the top couple of performers booked gains in the neighborhood of 700%!

By contrast, in 2012 I found just 12 stocks that gained over a mere 200%, with just one stock soaring over 600%.

(Note: There were probably plenty of stocks in both years that enjoyed bigger gains, but when I compile my list each year, I limit my screen to stocks that average over 300,000 shares traded per day and finish the year trading over 10. This helps to avoid the chaos of penny stocks and lightly traded issues that score low in liquidity. The stocks I’m looking for are ones that can appeal to big institutional investors, who are the driving force behind powerful, long-lasting rallies.)

2014 turned out to be more of a 2012-type year, with just 10 stocks gaining over 200%.

The really stunning thing about the top stocks of 2014 was the distribution among industry groups.

Nine of the top-performing stocks of 2014 were in the Medical and Biotech sectors! And of the 38 stocks that managed to top 100% price appreciation for the year, 20 were in those sectors.

It’s certainly not uncommon for pharmaceutical stocks to be among the leaders. Pharmaceutical stocks, especially smaller ones, are often news-driven, and the approval of a new drug (or even just a positive clinical trial result) can drive a pharma with no earnings history up the charts in a hurry.
Here are the top three performers of 2014. If you’d like to get a report on all 10 stocks that topped 200% for the year, reply to this email and I’ll send it to you within a week or so.

#1 Avanir Pharmaceuticals (AVNR 3.3 to 17, +404%) — Avanir Pharmaceuticals is a California-based company specializing in treatments for disorders of the central nervous system. AVNR began the year trading at 3, then took two major leaps. The first was on April 30, when a U.S. patent court affirmed and extended the company’s exclusive rights to NUEDEXTA through 2026. That ruling kicked AVNR from 3.4 to 5 in one day. The second gap up came on September 15, when good news from Phase II clinical trials of Avanir’s treatment for Alzheimer’s-related agitation caused an explosion higher, blowing AVNR from 6.7 to 12.5 on monster volume. AVNR drifted slightly higher after that blockbuster until December, when Avanir became the object of a takeover bid by Otsuka Pharmaceuticals. That news bumped AVNR up by 14% to around 17. And that’s where it finished the year. Unfortunately, unless you want to buy some Otsuka stock on the Tokyo exchange, you’re out of luck making any bets on Avanir’s future prospects.

#2 OvaScience (OVAS, 9 to 44, +384%) — Massachusetts-based OvaScience is a highly specialized biopharmaceutical company that focuses on improving fertility for women by creating mature, fertilizable eggs from a woman’s own egg precursor cells. The company has zero sales, but investors found something to like in its Q1 earnings report on May 8. Following that report, OVAS reversed its four-month doldrums and began to climb, making steady progress all year, climaxing in a four-day sprint from 27 to 48 in December. The December surge followed the announcement that all three of OvaScience’s fertility treatments had achieved their 2014 goals and that its OvaPrime treatment would be introduced into select international in vitro fertilization clinics by the end of 2015. There’s nothing like the scent of actual revenue to get investors’ attention.

Note: Subscribers to Cabot Small-Cap Confidential, our advisory on high-potential small-cap stocks, were advised to buy OVAS in October, when the stock was trading at 16.53. By the end of the year, when OVAS closed at 44.2, it was up 173%!

#3 Agios Pharmaceuticals (AGIO, 24 to 112, +368%) — Agios Pharmaceutical, a Massachusetts-based specialist in using cellular metabolism science to help patients with cancer and metabolic disorders, is an odd duck on a list of top-performing stocks. First, it started the year trading at 24, well outside the single-digit prices that spawn many leaders. Second, while it was volatile, it didn’t experience the kinds of gap-up moves that are often seen in stocks that dominate a year. Agios doesn’t have a marketable product; in fact, its revenue is primarily from development partners. Despite that, the company’s AG-221 candidate drug for the treatment of cancers of the blood (being developed in collaboration with Celgene) has received orphan-drug and fast-track designations from the U.S. FDA. And AG-120, another drug aimed at hematologic malignancies, is also in Phase I clinical trials. The potential of these drugs was enough to attract huge buying from investors.

In this week’s Stock Market Video, I continue the saga of growth investing in a choppy market. There are plenty of strong stocks, but the volatility and unpredictability of the market is keeping institutional investors away from big, prolonged moves that growth investors can piggy-back on. It’s a good time to nibble, but not a jump-in-with-both-feet situation.
Click below to watch the video!

Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here.

Mike’s Comment: I once went to an investment conference at which the presenter laid out a long-term chart of a stock called Ascend Communications (Cabot Market Letter made huge money in it back in the mid-1990s), detailing all the buy, add-on, partial profit and sell points on the chart over a couple of years. One attendee said “Yeah, but how realistic is that? Nobody’s ever going to be able to do all that perfectly!” But the joke was on him—in the market, the good news is that you don’t have to be perfect … yet in order to be very good (or, in Lombardi’s words, excellent), you have to study perfection! That’s one of the keys of successful investors.

Paul’s Comment: Whether it’s your mother’s advice to “do your best,” or the Japanese kaizen admonition to “improve constantly,” the standard wisdom is always about how to get good things to happen. Coach Lombardi’s method was to seek perfection, and that seems to have worked pretty well. I like to remind people that if you just improve one little thing every year, within a few years, you’ll be re-writing the record books (or at least your own record books).

In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.

Cabot Wealth Advisory 1/5/15 – A New Trend Gets Rolling

In this issue, Tim Lutts, head of Cabot Stock of the Month, takes a hard look at which industry does the most lobbying. Tim also talks about the trend toward healthier eating and how that affects the fourth of his 10 Revolutionary Stocks. Stock discussed: Hain Celestial (HAIN).

Cabot Wealth Advisory 1/6/15 – Cuba: A New Frontier for American Investors?

Nancy Zambell, Editor of Investment Digest and Dividend Digest, writes about the opportunities that may be opened up by thawing relations between the U.S. and Cuba. Vehicle discussed: Herzfeld Caribbean Basin Fund (CUBA).

Cabot Wealth Advisory 1/8/15 – Top 3 Consumer Stocks for 2015

Chloe Lutts Jensen, Chief Analyst of Cabot Dividend Investor, writes in this issue about the effects of falling oil prices. She also names three consumer stocks that look poised to take advantage. Stocks discussed: Church & Dwight (CHD), Reynolds American (RAI) and Target (TGT).

Sincerely,

Paul Goodwin
Chief Analyst of Cabot China & Emerging Markets Report
And Editor of Cabot Wealth Advisory

Comments