The past three years have been a bit of a roller coaster ride for the stock market. We saw how the pandemic wrecked several industries’ balance sheets and supply chains. Following the global vaccination drive, economies around the world and in the US opened up with a vengeance, resulting in huge stimulus checks. This, along with the energy and food-price shock and disrupted supply chains, was blamed for the persistently high inflation, which peaked at 9.1% in June 2022.

The Fed had already started hiking interest rates to ease inflation and work towards a soft landing, with the first hike coming in March 2022. By July 2023, the central bank had raised it to 5.25-5.50%, making borrowing all the more challenging.

The tech industry had kept the momentum from 2020 lockdowns well into 2021. The largest tech companies out of the 500 biggest companies trading in the US grew by an average of 33% from the start of 2021 to the end.

However, the tech industry was heavily impacted by the rate hikes that followed in 2022. This resulted in the large-cap aggregate tech indices losing nearly 29% of the gains made in the year prior, as prospects for growth became bleak. The upper percentiles of the energy industry in market cap had a similar run in 2021 but remained immune to the economic downturn that followed in 2022, posting gains of 59% for the year.

The aggressive rally in the energy industry resulted from a combination of supply-chain disruptions, OPEC production cuts, the Russia-Ukraine war, and the revision of energy sourcing in Europe, directing much of the energy capital inflow to the US from the continent.

Coming back to tech – the industry wouldn’t stay on the sidelines for long. The start of 2023 to the end saw the large-cap US-traded tech equity grow by 38.6%. At the core of the resurgence was the AI-led boom combined with semiconductor supply chains that had recovered substantially by then. Other factors included CHIPS and Science Act, improved efficiency in the industry, and a rate-hike slowdown.

What’s Ahead for the Market?

The US economy looks to be on schedule for a soft landing, according to a Financial Times’ survey of economists. This is on the back of the Fed’s rate reduction of 50 basis points in September 2024, which, as noted by the CFO of a large US bank Denis Colman, is a signal towards a soft landing. This is not a sure shot, however, since some experts remain wary and continue worrying about a recession.

For instance, Piper Sandler’s Chief Global Economist Nancy Lazar noted that the “jumbo” rate cut by the Fed is reminiscent of the similar Fed policy easing of 2001 and 2007, which couldn’t avert the problem.

However, according to analysts, the case for a soft landing appears to be justified given the September jobs report and other improving indicators. The September report by BLS shows that the non-farm payrolls grew by 254,000 for the month, exceeding economists’ estimates by 41%. Moreover, the July and August reports, which had spooked some economists, were also revised by a combined 72,000 new hires, which wasn’t without historical precedent.

Further, grocery prices, adjusted for growth in real wages, are back to the pre-pandemic levels. It took 3.59 hours of work to afford a week’s worth of groceries in November 2019 and took 3.57 hours of work to afford them in September 2024.

Moving ahead, Rob Rowe, Regional Research Director and Head of Global Strategy at a large US bank is ‘tactically bullish’ on the back of continuing tech recovery and the markets “pricing in a soft landing”. They expect at-least 25 basis-point rate cuts at each Fed meeting through year-end.

With regards to tech industry, their outlook suggests selectivity. In response to a question about their outlook on the tech industry, they said:

“I think we have to be selective here. We like Semis as a recovery play but we’re kind of underweight on software.”

Rowe has a bearish outlook on oil, given geopolitical variables don’t change in a way that leads to oil prices shooting up.

Methodology

For our list, we have picked stocks from the index in question that have had the highest 3-year annualized returns and we ranked them as such, in order of their 3-year CAGR.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

10. Targa Resources Corp (NYSE:TRGP)

3Y CAGR: 46.20%

Targa Resources Corp (NYSE:TRGP) is a Fortune-500 midstream energy infrastructure company out of Houston, TX.  Targa’s aggressive growth can be attributed to its presence in the Permian basin, which accounts for 18.3% of the gas production in the US, up from 5.8% in 2011. You can read about it more in one of our other articles here.

Targa Resources (NYSE:TRGP) is up 87.3% year-to-date, owing to its financial performance resulting from an extensive infrastructure network, with initiatives to grow the capability and increased commodity sales and midstream services fees. The company plans to address the growing demand through the expansion of its assets. In August 2024, Targa announced the building of two new 275 MMcf/d cryogenic natural gas processing units, Bull Moose II in Permian Delaware and East Pembrook in Permian Midland.

Targa resources had gone through a severe downturn during 2014-2016 natural-gas-price collapse. As a result, it has transformed itself to a large extent to withstand industry downturns, with 80% of its gathering and processing volumes becoming fee-based. The company also had a debt problem mostly from the downturn it faced in 2014-2016 but also due to its high growth expenditures.

However, many of its projects have started generating meaningful cash flows in the past few years, leading to a reduced debt load. As of Q2, 2024, the company’s consolidated net leverage ratio stood at 3.6x, well within the management’s target range of 3x-4x.

9. Howmet Aerospace Inc (NYSE:HWM)

3Y CAGR: 50.30%

Howmet Aerospace (NYSE:HWM) is an Aerospace company out of Pittsburgh, Pennsylvania. The company designs and manufactures components for aerospace engines, multi-material structures for aircraft, fastening systems and forged wheels among other products. The stock has gained 50.30% on an annualized basis in the past three years and 97.6% year-to-date on the back of strong financial performance.

In July 2024, the company reported that Boeing – one of its clients – slashed their parts’ order for their best-selling programs but the company said that the order still remained above the company’s actual production rates for Boeing 737 and 787. The company has been producing aircraft at a rate lower than its stated goal to plug quality holes after it came in the spotlight for safety lapses.

Despite that, the demand for engine products and fastening systems remains strong and Howmet Aerospace is one of the biggest players in the market. But while many aerospace suppliers struggled to report consistently positive cash flows in the previous few quarters, Howmet has grown it consistently over the past four quarters, with Q2, 2024 growth being at 73.3%

Janus Henderson Contrarian Fund made the following statement about Howmet Aerospace Inc. (NYSE:HWM) in their Q2 2024 investor letter:

“Howmet Aerospace Inc. (NYSE:HWM), a manufacturer of specialized aircraft components, was another top contributor to relative performance. The stock experienced a notable performance boost after beating first-quarter earnings expectations and raising full-year guidance. The company benefited from a resurgence in air travel, pushing commercial aerospace sales up by 23%. Despite the potential sales impact from Boeing’s 737 MAX production challenges, the extended operation of existing airline fleets could lead to heightened demand for spare parts, offsetting concerns.”