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.
A businessman holding up a chart displaying business growth
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.”
8. Builders Firstsource, Inc. (NYSE:BLDR)
3Y CAGR: 51.02%
Builders Firstsource, Inc. (NYSE:BLDR) is the manufacturer and the largest supplier of building products, prefabricated components and services in the US. A major part of BFS’s growth strategy has been through acquisitions. For example, the merger with BMC Stock Holdings in the start of 2021 was transformative to its growth and profitability.
Looking ahead, the company is well-positioned, as FED’s September rate cut, with more to come, are likely to improve demand for single and multi-family homes.
This is what ClearBridge Growth Strategy said about BLDR in their Q3, 2024 investor letter:
“The Strategy has historically been underweight industrials and consumer discretionary sectors, but positioning moves over the last year have helped close these gaps and provided several new contributors this quarter. Builders FirstSource, Inc. (NYSE:BLDR), a supplier of building products, rose strongly in the quarter on optimism that rate cuts will improve demand for single family and eventually multifamily residential construction. Cintas, a uniform rental and facilities services company, put up solid results as cross-selling and margin expansion efforts continue to bear fruit. Starbucks also provided a lift as the stock reacted positively to the naming of a new CEO, industry veteran Brian Niccol, who is expected to reinvigorate operations.”
7. Broadcom Inc. (NASDAQ:AVGO)
3Y CAGR: 55.87%
Broadcom (NASDAQ:AVGO) has been one of the most profitable stocks in the S&P500 index over the past few years. The company has been very successful in its patent portfolio strategy by acquiring other tech companies by leveraged buyouts. Some of its recent acquisitions include CA Technologies and VMware, with VMware being especially prominent.
Further, Broadcom is the biggest player in the custom silicon market that lets other companies design their own AI accelerators, which are increasingly opting for specific chips for specific use cases.
Following is what Clearbridge Large Cap Value strategy had to say about AVGO in their Q3, 2024 investor letter:
“In IT, we bought Broadcom Inc. (NASDAQ:AVGO) as we believe the company has a long runway for growth with its custom silicon business, which should be more durable and less volatile than other components within the AI food chain. We also believe the acquisition of VMware creates another opportunity for steady, subscription-based durable growth that is still in its early innings. We believe the stock has an attractive risk/reward profile given the reasonable visibility toward mid-teens EPS growth at a low-20s P/E multiple. We made room for Broadcom by exiting Lam Research, whose shares we believed priced in a full recovery, while we grew increasingly concerned that China exposure might create an air pocket.”
6. Eli Lilly and Company (NYSE:LLY)
3Y CAGR: 58.38%
Eli Lilly (NYSE:LLY) is a well-known pharmaceutical company out of Indianapolis. The stock has had annualized 3-year gains of 58% and YTD gains of 55%. Eli Lilly’s performance is riding on the success of GLP-1 weight loss and Alzheimer’s treatments. It is especially true for its GLP-1 drugs, which have led to massive gains, with more to come.
Markets and Markets forecasts that GLP-1 drug market could be worth $471.1 billion by 2032, growing at a very high CAGR of 33.2% from 2024 to 2032. In this space, Eli Lilly and Novo Nordisk are two of the biggest players. Barron’s analysis suggests that there could be an annual sales opportunity of $100 billion – $150 billion for GLP-1 drugs in the US and smaller rivals are scrambling to catch their piece of the pie, based on their tracking of 50 GLP-1 drugs in development. However, the fund believes Eli Lilly and Novo Nordisk could remain a duopoly in this market for at-least until 2027 or 2028.
Eli Lilly is already cementing its dominance with the next generation of GLP-1 drug in phase 3 trials that has been shown to be even more effective and further generations are in development. In addition, the daily oral GLP-1 that the company has developed is more economical and easier to manufacture and offers the convenience that comes with oral pills. This is likely to lead Eli Lilly to have deeper access in the GLP-1 market.
This is what PGIM Jennison Health Sciences Fund had to say about LLY in their Q2, 2024 investor letter:
“Eli Lilly and Company (NYSE:LLY) is a diversified biopharmaceutical company with core franchises in Diabetes, Obesity, Immunology, Neurodegeneration, and Oncology. The company is one of the two global leaders in diabetes with blockbuster products in Trulicity and recently launched Mounjaro (tirzepatide) to serve this large underserved market. To date, the Mounjaro launch is the strongest for any diabetes drug ever launched, which we attribute to off label usage in the obesity indication as well as on label use in diabetes. We believe the tirzepatide (the generic name for Mounjaro) franchise is also uniquely positioned to grow substantially from here thanks to its recent approval for obesity. To that note, in late 2023, Eli Lilly received approval for tirzepatide in obesity and is commercializing it for obesity under a new brand name, Zepbound. While still early in the launch, uptake has been extremely strong, exceeding that of both Wegovy and Mounjaro at the same timepoint in their launches. While Alzheimer’s Disease has been a tough market for drug developers, Eli Lilly has breakthrough designation from the food and drug administration (FDA) for donanemab and recently presented Phase III pivotal trial data that positions donanemab as the most efficacious drug in the class. In June, the FDA advisory committee voted unanimously in favor of donanemab as an effective treatment where the benefits outweigh the risks, praising the therapy as innovative. Donanemab was then approved under the brand name Kisunla in early July. Eli Lilly also has exciting franchises in dermatology, immunology, and oncology that are starting to add meaningfully to growth. With a proven history of strong commercial execution and one of the highest research and development (R&D) success rates in the industry, we see opportunity for continued success. With a lack of meaningful patent expirations for the rest of the decade. Eli Lilly is uniquely positioned amongst its larger-cap peers. Recent positive performance has been driven by the continued strong growth of Mounjaro and Zepbound, which led to a big guidance raise on the 1Q call, an unusual action for Eli Lilly this early in the year, which speaks to their confidence in the strong trends they are seeing.”
5. Arista Networks, Inc. (NYSE:ANET)
3Y CAGR: 61%
Arista Networks, Inc. (NYSE:ANET) is a computer networking company out of Santa Clara, CA. The company provides client-to-cloud networking for data center, campus and routing environments. One of Arista’s key selling points is its Extensible Operating System, that works across different cloud networks and is based on Linux, enabling integration with third-party software. Further,the company uses the same software across all its switches and routers and its operating system allows for sophisticated data analytics. All these factors allow for cheaper maintenance and updates, higher security, and fewer switching tiers, which leads to its clients having a lower total cost of ownership relative to legacy vendors.
Arista has rapidly gained market share in the datacenter switch market, from 3.5% in 2012 to 18.8% as of Q2, 2019, based on a Crehan Research Datacenter Switch Market Share Report. For the past three years, Arista had annualized gains of 61% and the stock has gained 73.6% YTD. The company posted strong financial results in its fiscal Q2 earnings report, with revenue having grown nearly 16% year over year, and EPS at 34.19%.
In their Q2, 2024 investor letter, Madison Mid Cap Fund talked about their confidence in ANET’s long-term growth prospects, but trimmed down their position due to the “risk/reward offered.”
4. Fair Isaac Corporation (NYSE:FICO)
3Y CAGR: 71.52%
Fair Isaac Corporation (NYSE:FICO) is a data analytics company out of Bozeman, Montana that provides credit-scoring services. The company posted solid Q3 financial performance and is up 74% year-to-date. In Q3, the company’s revenue was up 12% year over year at $448 million. The non-GAAP EPS was up 10%. The company also raised its annual guidance.
Since mortgage originations are 50% below their long-term historical average, Baron Fintech fund estimates that this return to normalcy could increase FICO’s earnings by half. They continue to hold FICO due to its competitive advantage.
Conestoga Capital Advisors had the following to say about Fair Isaac Corporation (NYSE:FICO) in their Q2 2024 investor letter:
“Fair Isaac Corporation (NYSE:FICO): FICO is a leader in predictive analytics and decision management software and is also the provider of FICO credit scores. Fiscal 2Q24 results came in ahead of consensus’ expectations, with upside in revenue and margins due to special pricing in the Scores business. This also drove a healthy non-GAAP earnings per share (EPS) beat. While software revenue and bookings fell a bit short of expectations, platform growth continues at a solid pace and margins showed further signs of scaling higher. Importantly, FICO’s pricing power remains intact, and we believe this bodes well for future results.”
3. Vistra Corp (NYSE:VST)
3Y CAGR: 90.4%
Vistra is a well-known integrated retail electricity and power generation company out of Irving, TX. The company’s power generation fleet totals to around 41,000 MWs of gas, coal, nuclear, and solar facilities. Vistra’s merger with Dynegy created the lowest-cost integrated power company in the industry due to the former’s integrated ERCOT model and the latter’s generation capacity and retail footprint.
Vistra’s retail segment, which operates under brands like TXU Energy, also provide stability and consistent cash flows. Retail operations are less volatile compared to the wholesale power market, allowing Vistra to benefit from steady revenues.
The company also completed its acquisiton of Energy Harbor in March, making Vistra the second largest carbon-free, nuclear-electricity provider behind Constellation Energy. The company is now well-positioned to capitalize on tech companies looking for carbon-free power for their data centers and large AI models. Vistra has gained 244.5% so far this year, becoming the best-performing S&P500 stock year-to-date.
This is what Meridien Hedged Equity Fund had to say about the company in their Q1, 2024 investor letter:
“Vistra Corp. (NYSE:VST) was a top performer in the strategy over the past quarter, with its shares rallying over 80%. A key driver has been the thesis that the projected growth of power-hungry data centers, spurred by the rise of generative AI, will increase electricity demand and power prices. This is expected to significantly benefit incumbent power generators like Vistra. The company’s efficient generation portfolio, especially its nuclear and natural gas plants, is well-positioned to capitalize on rising demand, scarcity pricing, and ancillary services in the Texas power market. Vistra is also pursuing opportunities to potentially sign high-margin power offtake agreements directly with data center customers for its nuclear plants, similar to a recent deal by peer Talen Energy and Amazon. We continue to like Vistra’s strong free cash flow generation supporting continued share buybacks and debt reduction, synergies from the recent Energy Harbor acquisition, and a favorable power market backdrop with rising spark spreads. We trimmed the stock following its strong performance during the period.”
2. NVIDIA Corporation (NASDAQ:NVDA)
3Y CAGR: 82.08%
NVIDIA (NASDAQ:NVDA), for all intents and purposes, is considered the driving force behind the AI boom, especially on the hardware side. Nvidia’s core business revolves around designing Graphic Processing Units (GPUs). The company’s biggest market is the gaming industry since GPUs are almost essential for high-performance rendering due to their parallel processing capabilities. As it turns out, GPUs are also incredibly useful for training AI models for the same reason, since AI models require a lot of matrix calculations simultaneously.
It goes without saying that Nvidia isn’t the sole GPU designer but what put it at an advantage over its competitors is its proprietary parallel computing platform – CUDA. Having a GPU market share of 70.5% as of 2016, Nvidia recognized the need for a programmable architecture very early since programming parallel processing is recognized as notoriously difficult. The CUDA platform is now supported by a library of thousands of specific applications, which makes it hard to compete with Nvidia in the space of parallel programming platforms. This, coupled with the explosive demand for GPUs for training AI models, resulted in NVDA becoming the most valuable company in the world in June 2024 before Apple regained the top spot for itself. NVDA grew at an annualized rate of 82% over the past three years, and has gained nearly 212% over the past year and 184% year-to-date.
Nvidia’s highly anticipated GPU – Blackwell – is expected to offer substantial inference performance gains over its previous GPUs, and is already experiencing a high level of demand from hyperscalers. The GPU will be rolled out in Q4, 2024, but has already been booked out for 12 months.
This is what Stacy Rasgon, a Bernstein senior analyst, had to say about NVIDIA (NASDAQ:NVDA) in one of the latest CNBC programs:
“People are getting excited about the story again as we approach earnings, year-end, and next year when the new platform with Blackwell starts to ramp up. By all indications—based on supply chain checks and everything else—demand for this product looks off the charts.”
The analyst believes the stock is trading at a discount:
“It’s much cheaper today than it was before the run started a year and a half ago. The stock has risen significantly, but earnings have increased even more than the stock.”
1. Super Micro Computer, Inc. (NASDAQ:SMCI)
3Y CAGR: 136.26%
Super Micro Computer, Inc. (NASDAQ:SMCI) is a tech company out of San Jose. The company provides parts as well as comprehensive solutions for servers that can be tailored to any size and workload type. What has given supermicro perform so well though, is its liquid-cooled technology.
The traditional solution to server cooling is an air-conditioned room. Supermicro’s liquid-cooling technology eliminates the need for air-conditioned rooms. According to the company itself, its liquid-cooled technology saves up to 40% in energy costs and 80% in space.
Supermicro has had annualized 3-year returns of 136% and has gained 65.5% year-to-date. However, the stock declined 20% on August 7, a day after the company reported its fiscal Q4 earnings that fell short of analysts’ estimates, especially on margins that came out weak.
Bank of America analysts downgraded Super Micro Computer, Inc. (NASDAQ:SMCI) from ‘Buy’ to ‘Neutral’ on August 6, expecting several next quarters for the company to be weak on margins basis, despite expected revenue growth. You can also read a bear case theory on SMCI we picked up from Chit Chat Stocks’ substack that delves into alleged accounting malpractices on the part of the company here.
While we acknowledge the potential of the best-performing S&P500 stocks in the Last 3 Years, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NVDA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
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