With the second quarter in the books, I think it’s worth looking back to see what the strongest stocks were and what they can tell us about the future for the rest of the year. We need to think about the best of both the S&P 500 and the Nasdaq because they tell incredible stories of how many sectors are truly working in this bull market.
You would believe, for example, that the best-performing stocks would be the re-opening stocks. That would be almost totally wrong with nine of out of 10 stocks having little to do with the great re-opening and more stocks having to do with the impact of the pandemic as it lingers on.
The variety baffles: you have companies that I, as someone who is a voracious student of stocks, haven’t looked at in years. Only one stock could possibly be called a perennial and that’s the first and most obvious one, Nvidia (NVDA) , the artificial intelligence gaming platform company, two of the multiple ways I could have chosen to describe it.
It’s also not a group known for its promotion — this is the most low-key top-10 I can recall. Nor do they have anything to do with the false dichotomy of value versus growth. That battle royale is all but worthless in describing the results of the best of the best.
As I rip down these you will understand the variegated nature and perspective they give to what’s working and should continue to work well into the second half.
First, Nvidia, by a long shot. The strength of this company and the incredible team put together by Jensen Huang, the da Vinci of tech, just continues to astound. Nvidia, now our largest semiconductor stock, at $510 billion, up from $15 billion five years ago, jumped 49% last quarter on a combination of an amazing quarter, fantastic raised guidance and the increasing likelihood that regulators will allow it to buy Arm Holdings, the British company that excels in cellphones and personal computers, areas that Nvidia has zero overlap, hence the logic to the deal.
Just this weekend we got big news on the prospect of the deal, a blog post from Simon Segars, the CEO of Arm about how it is very important for the U.K. to approve the deal lest Arm fall behind in artificial intelligence, Nvidia’s strength. “There’s massive potential for our combined expertise to push the technology of the future to new heights,” Segars wrote. He mentions in the blog that the company contemplated an IPO, but “determined that the pressure to deliver short-term revenue growth and profitability would suffocate our ability to invest, expand, move fast and innovate.” The deal, he wrote, “is the best opportunity for Arm and our customers and will enable the U.K. to be a meaningful industry player in the era of artificial intelligence.” The big objection by the U.K. authorities is a minimizing of British tech research but Segars made it clear that rather than siphoning off talent it would actually be a way to increase resources. Very compelling stuff.
I’m sure some of you might think that Nvidia is more of an Ethereum play, because its cards are used to mine the cryptocurrency. In reality that’s a tiny portion of their business and is made up of cards that aren’t up to specification for gaming, scrap if you will.
Jensen’s got so many priorities, gaming, high-performance computing, customer service, pick and place robots and fraud detection. But of all the tasks he spells out, he seems to have the most interest in conquering self-driving cars, working with Mercedes to do so. Truly autonomous vehicles seem to have taken a step backward, a sense that as long as one or two people die from these cars per month, it crushes hopes even as humans are dreadful at avoiding accidents because of sleep, exhaustion and alcohol. But if anyone can do it, Jensen can.
Second, you knew there would be an energy in here, and it’s befitting that the one most representative of the new way to be an oil company, Devon (DVN) , tops the list up 33%. Devon’s run by Rick Muncrief, which is odd in itself because the new Devon is a combination Devon and the much smaller WPX, which had been run by Muncrief. But anyone who knows him, and I got to meet him when we went to the Bakken to see the holdings of Continental Resources (CLR) , can understand 1, why he is running the joint and 2, why his company is outperforming.
Rick gets that Wall Street is sick and tired of oil companies that spend beyond their means and are awful stewards of capital. “High returns on capital employed, reduced reinvestment rates and free cash flow generation will determine the winners in this cycle,” he explained in his last conference call, “not the historical behavior of delivering outsized production growth.”
The returns Devon’s giving you include a fixed and a variable dividend that gives investors a better return than most oils. Given where oil’s going and the high quality of the company’s Permian assets, I think you can see why this may be the oil to own for the second half, too.
I may call Jensen the da Vinci of the era, but few CEOs call their past quarter a “present-day Michelangelo.” Yet, that’s exactly how CEO Pete Arvan described the fourth quarter of last year’s Pool Corporation (POOL) results. Hubris? How about factual, and, even better, he said on his recent call that it turned out to be a “warm-up for a true masterpiece.”
As I said earlier, you would think that great re-opening investments would predominate. Pool, a maker of everything you need to have a pool and run it, could be considered the quintessential backyard improvement stock. So what gives? How about Pete’s list: “favorable homeowner dynamics, including rising home valuation, low interest rates, a healthy job market, government stimulus and greater millennial participation in the housing market.” With a stock that’s up 32%, Pool might otherwise be the stock I worry about the most, except for the “new normal,” as the company calls it, which mean means more people working from home in the future than the past with a greater focus on home improvement.
That’s a lasting set of circumstances.
You have to go to the fourth best performer before you get to classic reopening trade: Gartner, symbol (IT) , of course. Here’s a consulting company for all things that any enterprise may need but is chiefly known for its in-person conferences, making this very much a pent-up demand story. Gartner is one of the least promotional companies in the S&P even as it has 14,000 companies and is known for its brand-name benchmarking, a la the Gartner Magic Quadrant standard that companies love to trumpet. The company picked up a lot of new business during the pandemic but it’s clear that the stock buyers believe that year-over-year performance in the second half will surprise. To me this one, with a stock up 32%, seems too obvious. I think the trade’s been had. I would pass.
If you were to be escorted back in time four years ago you would think I had to be kidding if I told you that the stock of Equifax (EFX) , the credit analysis company that had one of the worst hacks in history, would finish in the top five, also up 32%. Amazingly, though, the brand survived, new products thrive, mortgage business is strong enough, and credit checks will no doubt soon accelerate once people start spending beyond their means again. This company shocked people with its much better than expected results and its more aggressive buyback than expected. I think, though, this could be a terrific second-half story because it is moving its business to the cloud which will make it cheaper to run without any compromise in security. We think of them just as a credit monitoring and verification company, but not as the dominant one with 115 million active users. The breadth of product here is astounding, so big that even as mortgages tailed off in the quarter business accelerated. This might be the most unheralded fintech out there.
A tech, an oil, a home improvement, an information specialist and a credit analysis company, now there’s a disparate group.
Now on to the Nasdaq.
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