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Common Factors Underlying The Highest Outperforming Stocks

Summary and background

  • Identifiable common factors underlie the highest outperforming stocks
  • These common factors have been an evident trend for the last 25 years

In two recent SA Instablog articles, I outlined some excepted data and initial analyses for more than 80+ stocks, across both the NYSE and NASDAQ Exchanges, whose price increases have outperformed comparative market indices to such a notable extent that we refer to them as Exceptional Stock Market Performers. As mentioned previously;

The first criterion for these stocks to be classified as exceptionally outperforming is:

  • Growth in the listed stock price that is in excess of 100% per annum-and/or a minimum of 5 to 10X market Indice performance

This group of specified stocks have been identified and analyzed for their performance over multiple time periods (i.e. YTD, 1 and 2 years, 10 years, and 25 year performance).

Lists of the multiple stocks that have met this criterion of exceptional outperformance are provided in those recent, and other, blog articles.

This article now looks at a number of underlying factors that have been identified and which are common to this group of exceptionally outperforming stocks.

Common underlying factors

In addition to this first criterion, analysis of the data for these Exceptional Stock Market Performers (over multiple time periods) shows that they are characterized by the following underlying common factors.

  • FACTOR 1: The underlying business almost always has at least one distinct and market-leading competitive edge that is often also disruptive.

This market-leading competitive advantage enables the underlying businesses to grow quickly and successfully and also restricts market access for potential competitors, as evident in the following information about other underlying factors.

  • FACTOR 2: The underlying business is most likely, although not quite exclusively, in an industry or sector that is either primarily focussed on the application of technology (and usually a leading edge technology), or otherwise utilises or adapts technology for new or emerging opportunities.

This dominant influence of technology is very clear and obvious. Analyses of the data for the highest outperforming stocks shows that technology stocks, or technology-related stocks, have accounted for;

  • 100% of the Top 10 YTD exceptionally outperforming stocks (as at Sept 30 2015)
  • 80% of the highest outperforming stocks that have achieved triple digit growth in both of the last two calendar years
  • 80% of the Top 15 exceptionally outperforming stocks over the last 10 years
  • 80% of the Top 10 exceptional stock performers over the last 25 years

However, as noted in those prior blog articles, the type of technology stocks that meet the criterion for exceptional stock market performers has changed over the last 25 years;

  • From a 25-year trend or pattern of more standard IT/ICT and IT/ICT-related stocks [e.g. Cisco (NASDAQ:CSCO), Microsoft (NASDAQ:MSFT), Oracle (NYSE:ORCL) …
  • To a 10-year trend or pattern of more internet-based stocks [e.g. Priceline (NASDAQ:PCLN), Netflix (NASDAQ:NFLX), Salesforce (NYSE:CRM) …
  • To a noticeable trend or pattern over the last one to two years, and then continuing into the YTD outperformers, for stocks where technology is applied to medicine and healthcare [e.g. biotechnology / pharmaceutical and other healthcare-related technology stocks such as Radnet (NASDAQ:RDNT), Radius Health (NASDAQ:RDUS), Ovascience (NASDAQ:OVAS), Eagle Pharmaceuticals (NASDAQ:EGRX), Anacor Pharmaceuticals (NASDAQ:ANAC)
  • FACTOR 3: There is (obviously) very strong demand for the products or services that the business provides.

This demand may already be established for some of the exceptional stock market performers-usually in the few non-technology businesses in this space, such as Covenant Transportation Group. However, for many of the technology and technology-related businesses, the strong demand is often latent or pent-up and then escalates as the product or service gains rapid momentum in the marketplace.

There are numerous examples of this latent or pent up demand being unleashed on the market, such as the way in which Apple (NASDAQ:AAPL) and Microsoft capitalized on and helped to fuel the demand for personal computers far beyond the level that existed when Atari computers first entered the market. The way in which Facebook (NASDAQ:FB) quickly grew and dominated the emerging market for social media platforms and in so doing overtook competitors such as Myspace is another example of unleashed latent demand.

  • FACTOR 4: Exceptional stock market performers tend to operate in markets where the demand for their products or services is underpinned by strong demographic and/or economic factors.

For example, the rising wealth of the middle classes across industrialized economies, combined with the corresponding demographic trend of ageing populations, has contributed to a growth in healthcare consumerism across multiple growth markets. This in turn is helping to fuel the recent strong demand and growth in biotechnology stocks.

  • FACTOR 5: Exceptional stock market performers also have strategic, focussed and highly capable senior leadership.

This factor might seem obvious for well-known and high profile examples-such as Steve Jobs for Apple, Bill Gates for Microsoft, Larry Page and Sergey Brin for Google (NASDAQ:GOOGL), or Leonard Bosack and Sandy Lerner for CISCO (NASDAQ:CSCO). However, there is also an amount of research from other sources that links strategic, focussed and highly capable senior leadership with business success and significant growth in stock price.

In particular, Jim Collins has researched and written about this link between strong capable leadership and business and stock price performance (e.g. "Good to Great"). Similarly, Tim Jones and his team from an organisation in the UK called Innovation Leaders have also conducted some interesting, clear, and practically focussed research on this topic.

  • FACTOR 6: The underlying businesses are also more likely to be early to mid-stage or early to mid-development businesses, rather than mature established businesses.

This is not surprising, given that the vast majority of exceptional stock market performers are related in one way or another to technology. However, this factor does tend to be less evident across the NYSE and NASDAQ exchanges than for exceptional outperformers on the Canadian Stock Exchanges.

(NB: The full data tables and extended analyses that form the basis for the underlying factors can all be accessed and verified via our website.)

Will these factors continue to underlie future exceptional stock market performers?

No-one has a crystal ball that can precisely foretell the future. However, there are a number of extrapolations (from the 25 years of available data and other relevant trend data) that can be reasonably made, from a probabilistic perspective, about which stocks are more likely to outperform the market in the near or foreseeable future.

In broad terms, because the identified common factors that are listed above have been evident for exceptionally outperforming stocks across multiple time periods over the last 25 years, it's reasonable to expect that these same factors will continue to characterise other similar exceptional stock market performers, at least in the near future.

More specific details of these extrapolations will be considered in a future article.

In the meantime, given the timing of this week's IPO for the software-tools maker, Atlassian (Pending:TEAM), it might be timely for prospective investors to consider the extent to which the identified factors for exceptional stock market performers that are outlined in this article also apply to that business …

Disclaimer: No guarantees or representations are made or intended from the information and analysis presented in this article. Exceptional Stock Performers is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor before making any investment decisions.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.