- The recession-less decade led several stocks outside the tech sector to move from post-financial crisis trough to peak returns of 1,000%-plus in the 2010s.
- Among the biggest winners were bricks-and-mortar stocks that defied the Amazon retail effect, including Ross Stores and Ulta Beauty.
- One hidden "tech" gem was dental sector company Align Technology.
The S&P 500 has returned about 30% this year, capping what has been a tremendous decade for stocks. In eight of the past 11 years, the S&P 500 has posted a double-digit gain. That's not so uncommon: Since 1926, U.S. stocks have posted double-digits gains 54 times in a year. But some stocks have been uncommonly good over the past decade, returning over 1,000% to shareholders.
You probably know some of them already: Netflix, which has had the best decade of any stock, up more than 4,000%. And Amazon, which made revered CEO Jeff Bezos the richest man in the world — and has touched a $1 trillion in market cap a few times, including earlier this year — with a return of roughly 1,200%.
Netflix and Amazon stocks share something else in common: they are technology-driven companies in the S&P 500 that are not classified as being part of the technology sector. Rather, Netflix is in communications services (also home to Alphabet and Facebook), and Amazon in the consumer discretionary sector of the S&P 500. There are still more surprising S&P 500 1,000%-plus winners from the past decade that made shareholders happy operating outside the infotech center of the bull market.
Some benefited, at least partially, by the timing of the economic cycle shift, riding the trough of the financial crisis recession to the current peak. That includes equipment company United Rentals, up 1,605%, through Dec. 20, according to S&P Global Market Intelligence. "The business is one of great cyclicality so the peaks and valleys can be meaningful, so 2008/2009 is a favorable starting point if you are assessing strength and progress over the cycle," noted Northcoast Research analyst John Healy.
"In the middle of the deep recession, with URI being a cyclical stock and one that had too much leverage, it got really cheap, so your starting point is low," added Analyst Rob Wertheimer or Melius Research. But he said that's far from the whole story. And adoption of tech was part of the turnaround.
"URI moved years ahead of the industry to adopt tech solutions for pricing, for logistics and efficiency in loading and planning trucks. They use their own implementation of Salesforce to give sales reps mobile access to accounts, local inventory," Wertheimer noted in an email. "More recently, they have been using telematics and benchmarking to help their customers drive efficiency, sometimes telling customers when they are not using rental equipment, so they can stop renting it. The equipment can be rented to someone else, and the customer is made more efficient."
O'Reilly Automotive managed to fend off the threat from online sales of auto parts, including from Amazon, and return over 1,000%.
Scot Ciccarelli, RBC Capital Markets analyst, said in its case a well-timed 2008 purchased of a company called CSK, which was a massive underperformer, led to an improved sales per store and margin profile for the better part of the next 10 years. "Further, they have continued to grow their store base, expanding their distribution reach. Their strong customer service and distribution capabilities enabled them to continue gaining market share in a high margin, high ROIC [return on investment capital] business that isn't very price elastic, making it difficult for newer entrants like Amazon to enter."
Strong cash flow also allowed O'Reilly to take part in the buyback boom of the past decade, (share count is down 40% since 2008), improving earnings per share for all shareholders.
Other huge gainers are technology companies, but in sleepy and sophisticated corners of the market where becoming a household name is not an option. Fixed-income electronic trading company MarketAxess Holdings posted a 3,000% return over the past decade.
"For MKTX, it's all about electronification of the credit markets," noted Compass Point analyst Chris Allen. "They have roughly 85% share of the electronically traded U.S. credit market. Importantly, only 20-25% of the U.S. HG [high grade] market trades electronically and roughly 12-15% of the U.S. high-yield market trades electronically. So there is still a lot of room for growth of electronic trading of credit," he said, though he noted competition from Bloomberg, Tradeweb and Intercontinental Exchange. "Electronic trading in financial markets is nothing new, just some markets take more time to migrate than others due to market structure and other issues."
A few of the 1,000%-plus non-infotech crowd come from boom or bust spots in the market that are always hot trades, such as biotech and medical technology. Heart equipment maker Abiomed is up 1,765%, according to S&P Global Market Intelligence, though it has experienced the volatile swings common to its niche lately. Regeneron Pharmaceuticals is a biotech that has boomed over the past decade.
But in less expected "medtech" winner territory is the maker of the Invisalign dental alternative to braces, Align Technology, which is among the top 10 S&P 500 stocks over the past decade from outside the infotech sector. So are retailers Ross Stores and Ulta Beauty. There is no guarantee these stocks continue to beat the competition; at least one has been under pressure lately — and all face continued threats from new technology and limits to the exceptional growth of the past decade. But here is a little more on how they stayed ahead of the competition in the 2010s.
Market return: 1,431%
S&P 500 sector/sub-sector: Health care/Health-care supplies
Analyst take: John Kreger, health care analyst at William Blair, said there is a clear technology theme behind the success of Align and it is a theme that he thinks should persist in the next decade.
"That theme is the conversion of the practice of dentistry from analog to digital. It is allowing specialty procedures such as orthodontics to be done with greater precision and greater ease with the use of CAD CAM technology. This trend is also allowing general dentists to perform procedures that only specialists were trained to handle in the past."
But technology is a big a threat in addition to opportunity.
"I would say the key technology-based threat for Align will be does innovation allow orthodontics to leave the doctor's office entirely? Such a trend could shift the advantage away from Align and towards up and coming direct-to-consumer innovators like SmileDirectClub and Candid. These companies are already using technology (3-D scanners and e-commerce) to try to provide orthodontics to consumers without having to see a dentist or orthodontist at all."
Market return: 1,294%
S&P 500 sector/sub-sector: Consumer discretionary/Specialty Stores
Analyst take: Anthony Chukumba, managing director at Loop Capital, said Ulta's success starts with one explanation and it is not tech, but human-based: CEO Mary Dillon. She joined in 2013 and "has affected the vast majority of outperformance," Chukumba said. "She got them to where they are now."
One of the biggest moves Dillon made was to recognize Ulta was looked down upon by serious cosmetics customers, who went to Sephora or a department store. "She overhauled the store environment and made it more upscale and aspirational," Chukumba said. That, in turn, convinced more high-end beauty brands to take a look. There was a tech aspect to getting more beauty brands on board, because it was occurring amid an era of bricks-and-mortar retail store foot traffic challenges. "Declining mall traffic led to declining department store sales and store closures. That made Ulta more attractive to high-end beauty brands," Chukumba said.
In the era of app-based customer loyalty programs, Ulta's non-app based Ultimate Rewards has amassed roughly 34 million members who account for 95% of sales. "That's important because for prestige beauty products like Estée Lauder, Shiseido, MAC, discounting is non-existent," Chukumba said, and customers can only gain discounts through building loyalty points.
"It's a virtuous cycle, like Amazon. Ulta attracted more high-end beauty brands, which attracted more customers, which led to more sales, which convinced more high-end beauty brands to sell their products in Ulta stores."
Ulta's e-commerce business is growing 20-30% this year, though it had been as high as 30-40% in past years. But that still makes it different from many bricks-and-mortar retailers whose e-commerce efforts are not incremental but cannibalizing store sales. The Loop Capital managing director said the rewards program has played into Ulta's online growth, with its 34 million customer loyalty members comprising 95% of sales providing a mass of data that Ulta can use to more finely target customers and give them online offers that will be compelling based on their purchase history.
The risks to the Ulta story have been apparent this year, as the stock has taken a dive on fears of slowing growth.
"The biggest risk is that they've had this industry growth tailwind and that is becoming more of a headwind now," Chukumba said. "Color cosmetics sales have really slowed, and as a result, Ulta's comparable sales growth has slowed," which management has chalked up to a lack of new, compelling beauty trends.
And there is always Amazon on the horizon. Fears that Amazon convinces high-end beauty brands to sell on its platform have not materialized in a major way, but if it were to occur that that would be a huge risk to Ulta's ability to control the beauty shopper experience and pricing. It will be hard to replicate online "Ulta's in-store prestige boutiques, which in many cases are staffed by the beauty brands themselves," but Amazon could convince these brands to make deals. "It's the legacy prestige brands that really drive sales," Chukumba said.
Newer celebrity brand deals are also a threat. Lady Gaga's Haus Laboratories brand did an exclusive deal with Amazon. Rihanna has a huge brand, Fenty Beauty, with Sephora. Ulta has Kylie Jenner. ""Gaga doing an exclusive with Amazon might be the type of thing that convinces more high-end brands to explore Amazon," he said. "More beauty sales will eventually shift online, but Ulta has a strong online channel, so that should not be a problem. Now if sales shift online and they go to Amazon instead of Ulta, that's a problem."
Market return: 1,095%
S&P 500 sector/sub-sector: Consumer discretionary/Apparel Retail
Analyst take: Morningstar analyst Zain Akbari said Ross Stores success is mostly about execution, operational efficiency, and favorable consumer trends than anything tech-specific. However, he noted that the strength of the off-price apparel retail business model does hold a lesson for success in a tech-led era.
"The off-price apparel retailers (Ross, TJX, and, with much more mixed results than the other two, Burlington Stores) benefit from a treasure hunt format that is hard to replicate online, with a store experience that keeps customers coming back and vendor relationships that are durable and based on the sellers' supplier-friendly practices (which themselves are enabled by off-price retailers' agility)," Akbari said.
The Morningstar analyst said Ross has the largest off-price apparel banner in the U.S. (though TJX is bigger if you combine Marshall's and T.J. Maxx). Its strong management and merchandising team has capitalized on an environment in which retailers have access to a lot of attractive product, which is in itself a consequence of the turmoil in the full-price channel which Amazon helped to create.
The analyst does still fear Amazon.
"As far as tech threats are concerned, the degree to which a rival (Amazon or otherwise) can find a way to replicate the off-price experience with the full customer and vendor benefits of the in-store offering is a risk," Akbari said, noting that current digital efforts in the sector generally feature different product assortments than the physical stores. "Also, a dramatic improvement in the demand forecasting capabilities of clothing manufacturers could threaten product availability (the off-price retailers buy excess inventory from vendors, and improved forecasting could reduce those overruns)."
But the Morningstar analyst does not believe either negative outcome is "all that likely" in the next 5+ years, he said.