What a bizarre year so far: a huge rally in January, a major setback in February, and now a catastrophe in the mid-tier banking world – one that took almost everyone by surprise. It’s enough to make you want to hide in a bunker or at least stuff your money under the mattress. However, whatever the overall market action, there are always stocks that outperform considerably, encouraging an effort to pinpoint what the market craves, even in tough times. This year is no exception. We examined the best performing stocks this year, from the universe of equities with a market capitalization over $4 billion. The top 100 names rose at least 20%, at an average of 34%, compared to 1.4% for the S & P 500 and 9% for the Nasdaq Composite . Year to date data is current through March 16. Attributes of a standout group A few similarities stand out when we look at this cohort. First, there is the fact that this group fell hard in 2022, confirming the adage that the worst-performing stocks in one year are often the best in the next. A close multi-year study of that thesis might poke holes in that theory, but it applies in 2023 so far. Communications services, software and semiconductors were among the worst performers in 2022, and they have perked up in 2023. As the ownership of stock changes during a collapse, new owners arrive without embedded losses, replacing the bitter and angry prior holders. Second, smaller companies dominate the top performers, with an average of about one-third of the S & P 500. In addition, these equities often have a more limited float — that is, fewer shares available. This renders them more volatile on both the upside and downside. Profitability, the third common factor for success, might seem an obvious condition, but it is meaningless in many momentum-driven markets. After the rout of highly valued but pre-profitability tech and biotech names in 2022, investors have put a premium on earnings. The top 20 performing group was an outlier in terms of percentage of profitable names: 55% compared to 78% for the entire cohort. Among the best returns were several in Cathie Wood’s ARK Innovation ETF (ARKK) , such as Coinbase , DraftKings , Roblox and Roku , none of which have turned a profit, but all of which got a boost as shareholders moved back into her funds. Another common trait among the most successful stocks this year is their high short interest. As the Nasdaq fell through the fourth quarter of 2022, investors betting against the shares of previously high-flying stocks reaped huge gains. Those short bets were still in place at the beginning of the year, but as the stocks turned positive, those wagers soured and forced a short squeeze, propelling those shares higher. Not just a brief bounce Forty percent of the stocks in the top 100 fall within the technology sector. This industry, along with communication services, led the market up in 2020 and 2021 but collapsed in 2022. If we were merely experiencing a rebound effect, we would, of course, expect a substantial weighting in technology. However, there is likely more than a short-lived bounce going on this year. Tech stocks rose during Covid as demand accelerated, then became priced to perfection, in many cases. As the world reopened, shares imploded, demand returned to trendline, and earnings growth stalled. The sector experienced its own recession, exacerbated by sharply rising interest rates that penalize earnings expected years in the future. Compared to service sectors – airlines, hotels, restaurants and discretionary high-end spending – where demand has been on fire, technology has been in a slump for a year. The trend may now be changing, as consumer spending finally slows, both as pent-up demand wanes and higher rates take a bite from incremental spending. The rally in tech, across the market cap spectrum, could be a sign of improving times ahead and an acknowledgment by investors that the Fed’s rate-hiking efforts are either finished for the time being or close to complete. Attention has been moving away from energy, financials and consumer staples this year. While roughly 10 weeks of market action isn’t enough on which to proclaim a trend, we can be sure that bank failures aren’t a good sign for any economy. The recent market winners may be more likely to weather this storm, compared to many other industry groups, as they did during the pandemic. Karen Firestone is chairperson, CEO and co-founder of Aureus Asset Management, an investment firm dedicated to providing contemporary asset management to families, individuals and institutions.
