3 Common Denominators of My 3 Best-Performing Stocks of 2018 So Far
You might find it surprising, but I don't look all that often at how my stocks are performing. Sure, I keep up with the overall market and check in on some individual stocks that I own from time to time. However, I've found that it simply is not a good use of my time to constantly monitor the performance of stocks that I intend to keep for years to come.
That being said, I recently performed a quick run-through of how the stocks in my portfolio have performed so far in 2018. I found that my three biggest year-to-date winners are Align Technology (NASDAQ: ALGN), Editas Medicine (NASDAQ: EDIT), and NVIDIA (NASDAQ: NVDA).
Align has soared nearly 50% so far this year, while NVIDIA has gained over 30% year to date. Editas is up more than 20%. While these are three very different businesses and stocks, it occurred to me that they all share three common denominators.
Image source: Getty Images.
1. They're all leaders in their niches
All three of my top performers in 2018 are leaders in their respective niches. Align Technology dominates in the clear dental aligner market. Editas Medicine is a pioneer in CRISPR gene editing. NVIDIA is a leader in making chips for artificial intelligence (AI), cryptocurrency mining, and gaming. These companies are leaders because they arguably are the best at what they do.
Align single-handedly created the market for dental aligners. The company developed a great product -- Invisalign. Perhaps just as important, Align built mass customization processes that enable tens of thousands of Invisalign clear aligners -- where each is uniquely designed for a specific patient -- to be made and shipped every day.
While there are other biotechs focused on gene editing, Editas is the only one targeting Leber congenital amaurosis (LCA) type 10. LCA is the leading cause of inherited childhood blindness, and type 10 is the most common form of the disorder. Editas also owns the license to an important group of patents for use of CRISPR gene editing in treating LCA type 10 and other genetic diseases.
NVIDIA set the bar for powering gaming applications years ago with its graphics processing units (GPUs). The company's GPUs also turned out to be ideal for running AI and cryptocurrency mining software. Other technology companies hope to give NVIDIA a run for its money in AI, but for now, the company remains the clear leader.
2. They all have huge market opportunities
Align, Editas, and NVIDIA each has a huge market opportunity that remains largely untapped. For Editas, the potential market is totally untapped. There are no approved treatments for LCA type 10 or for several other genetic diseases that the biotech is targeting. Editas could realistically enjoy future monopolies in treating multiple indications.
Even though Align has enjoyed fantastic growth, the company has only scratched the surface of the potential for Invisalign. Align currently claims 12% of the total addressable market and less than 5% of the teen orthodontic market. The company thinks that continued innovation will enable Invisalign to treat more severe cases of malocclusion (misalignment of teeth) and expand the market by as much as 40% over the next few years.
As for NVIDIA, it seems like the sky's the limit. Estimates vary widely about how much the global AI market will grow in the future, but experts agree on one thing: AI will become a much bigger industry over the coming years than it is today. NVIDIA also should benefit from continued growth of gaming, especially as augmented reality and virtual reality applications are more widely adopted.
3. They're all expensive
One other commonality between Align, Editas, and NVIDIA is that their stocks are pricey. Align trades at nearly 56 times expected earnings. Editas doesn't have any products on the market yet -- and won't for at least several more years -- but the company's market cap stands close to $1.8 billion. NVIDIA stock claims a forward earnings multiple of 32.
Even with estimated growth factored in, the two stocks that already are profitable still have sky-high valuations. Align's price-to-earnings-to-growth (PEG) ratio is nearly 2.7, while NVIDIA's PEG ratio is 2.4. It's difficult to accurately predict just how much their markets will grow, though. The PEG ratios include growth projections for five years in the future. I think that all three companies should enjoy strong growth far beyond that period.
Premium valuations haven't held back any of these stocks from continuing to perform well. I suspect that's primarily because valuing high-growth stocks is more of an art than a science. Also, buyers are used to paying more for top-quality products. What applies to cars, jewelry, and other purchases also is relevant for stocks.
A magic formula?
Is buying expensive stocks that are leaders in high-growth markets a magic formula for investing success? Not necessarily. There are examples of stocks that meet these criteria that haven't performed nearly as well as Align, Editas, and NVIDIA. There also are examples of stocks that don't meet all the criteria that have performed really well.
However, the best stocks tend to be leaders in their fields and compete in markets with solid growth prospects. And these stocks often are relatively expensive because investors think highly of their prospects.
Most stocks don't check off these boxes. That leads me to one final observation: Perhaps the greatest common denominator for Align, Editas, and NVIDIA is that they're uncommonly good.
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Keith Speights owns shares of Align Technology, Editas Medicine, and Nvidia. The Motley Fool owns shares of and recommends Align Technology and Nvidia. The Motley Fool recommends Editas Medicine. The Motley Fool has a disclosure policy.
