The U.S. stock market's hottest stocks this year have mostly been youngish companies with little, if any, profit history. Investors these days are talking conservatively, but investing speculatively.
Among the 535 U.S. stocks with a market value of $10 billion or more as of Nov. 1, five have returned more than 100% this year. The table below shows the market value and total return (price appreciation plus dividends) for those favored five.
Return this year through Nov. 1
Array Biopharma Inc.
Lam Research Corp.
Roku Inc. (NASDAQ:ROKU), based in Los Gatos, California, makes technology for streaming video. As consumers have embraced videos, at the expense of live TV, Roku's revenue has nearly tripled in four years, to over $900 million. It has yet to show a profit.
Along with Amazon (NASDAQ:AMZN), Roku is a leader in the set-top box streaming market. This lets people "cut the cable" and save some money, though they then have less access to live news and sports.
After more than quadrupling this year, Roku sells for 18 times revenue and 36 times book value (corporate net worth per share). That's nosebleed territory. I wouldn't recommend chasing it.
Array Biopharma Inc. (NASDAQ:ARRY), based in Denver, is developing a series of cancer drugs. It has shown a profit only once in the past 15 years, in 2015. But the stock tripled this year as Pfizer Inc. (NYSE:PFE) made a takeover bid at $48 a share.
Big drug companies hungry for pipeline are often willing to pay a high multiple for biotech companies. I think Pfizer is overpaying, but that's neither here nor there.
People - especially teenagers - like the Snapchat app, where they can exchange messages and photos which vanish after a short time, leaving no permanent record. According to Snap Inc. (NYSE:SNAP), the site added 7 million daily users in the third quarter, bring its total to 203 million users.
The company's revenue has grown from $59 million in 2015 to $1.5 billion in the past four quarters. Snap shares, at $5.51 when this year began, now fetch more than $15, which is 9 times book value and 13 times revenue.
Snap has yet to show a profit in its young and happy life.
Carvana Co. (NYSE:CVNA) operates an online platform for buying and selling used cars. Like Roku and Snap, it has never turned a profit, but has fast revenue growth. Sales were only $42 million in 2014; they were $2.8 billion in the past four quarters.
The stock is expensive by some measures, but my big problem with Carvana is the debt -- more than 600% of stockholders' equity. That doesn't leave much cushion in the case of unexpected setbacks.
Lam Research Inc. (NASDAQ:LRCX) is the most seasoned stock in this group, having shown a profit in 14 of the past 15 years (all but recession-torn fiscal 2009). I have recommended the stock several times in this column, and have owned it personally and for clients in the past.
Lam is a leader in the "etch" part of the semiconductor business. It makes equipment that creates the tiny grooves into which microscopic circuits fit in chips.
I still like the stock, but not as much as I once did. Its revenue growth rate was nearly 21% a year in the past five years, but revenue shrank about 5% in the past 12 months, even as the stock was soaring.
I've written columns on this subject (the biggest gainers for the year's first 10 months) six times in the past -- in 2012, and in 2014 through 2018. In this series, I've discussed 30 stocks with big gains.
I turned up my nose at 22 of those stocks, yet they returned an average of 34% over the subsequent 12 months. Meanwhile, the three hot stocks on which I was neutral advanced 7.5% and the five I said to buy rose only 3%.
I've often said that investors pay too much attention to momentum. These results argue that I don't pay enough.
Bear in mind that my column recommendations are theoretical and don't reflect actual trades, trading costs or taxes. Their results shouldn't be confused with the performance of portfolios I manage for clients. And past performance doesn't predict future results.
Disclosure: I own none of the stocks discussed today, personally or for clients.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at email@example.com.
This article first appeared on GuruFocus.