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There are few things more exhilarating than watching a stock you own skyrocket. As the current poster child of vertical ascent, Nvidia stands unrivaled. If you have owned Nvidia, congratulations. What you don’t know, of course, is the likelihood that the hot streak will last. Perhaps a look at data about past winners will shed some light. At the risk of depressing those readers who have not owned Nvidia (NVDA) , let’s look at the numbers: NVDA 5Y mountain Nvidia, 5-years Five years ago, Nivida stock was $37. Today it trades at $891. That’s over a 2000% gain, compared to 83% for the S & P 500. There is no typo there. The past two years have also been incredible for NVDA, with the chip-stock even accelerating since the start of 2024. To determine whether hot streaks persist with high-octane stocks, we screened 12-month periods, going back 20 years. The goal was to select stocks that had surged at least 200% during one of these years and to observe their performance in the following year. The universe we studied contained S & P 500 large-cap stocks with market capitalization exceeding $20 billion at the beginning of this year. As it is difficult to identify the start date of any individual stock’s rally phase, we restricted each performance period to one year, looking at 20 distinct years of data. By fixing the annual time periods, we likely missed some formidable stock cases purely because of timing. However, it seems unlikely that our results will be statistically much different than vertical runs beginning in other months of the year. Tough to continue the momentum The data below will be surprising and disheartening to investors highly bullish on surge-extensions into the second year. The analysis offers scant evidence that outstanding stocks continue their upward momentum, but neither are they more likely to fall in the second year. They move almost equally in both directions. The equivocal results remain if the universe of 49 stocks is broken into two cohorts: those that vaulted 400% or more during a one-year period and those ahead by a more mundanely-spectacular 200-399%. Only 5 (42%) of the 12 in that elite 400+% group rose, while 7 (58%) fell. Almost three-quarters of the universe rose 200-399% in the first year, and their follow-up results were split almost evenly between up (18) and down (19). While the absolute numbers were uninspiring, the relative performance, versus the S & P 500, was even more discouraging. Of the 49 double-bagger-plus names, only 21, or 43%, outperformed the S & P in the next year, with 28, or 57% underperforming. The differentiator? Earnings If inclusion in a highly prestigious club seems to confer no clear benefit to a stock in the next year, what factors might predispose that second year’s success? The most obvious would seem to be earnings growth. In fact, this turned out to be significant: of the stocks that outperformed the S & P 500 in the second year, there was a strong correlation between earnings growth and high returns. Of the 21 names that outperformed, 80% had positive second year profits. As the table describes, the average earnings growth of that group was 89.6%, compared to 26.6% for all the other highflyers in the universe. This cohort of equities returned 73.5% in that second year while the average of all the other names studied was a decline of 12.5%. This data suggests that while tremendous market strength in one year does not predict the direction of stocks stock in the subsequent year, identifying super-charged forward earnings growth may well correspond with price outperformance. There is no evidence to support the belief that momentum is a long-term condition that exists in a vacuum. It generally relies on earnings growth, often before those profits emerge, but eventually as the company’s sustaining force. Of course, markets are generally efficient, so those exceptionally performing equities in the follow-up year may have benefited from an upside surprise in earnings. Dissecting the twenty years of data here might be a future challenge. So what’s it mean for Nvidia? That brings us back to Nvidia. The 2024 and 2025 calendar year estimates for the company are $2.14 and $24.00, or roughly double. Does that mean buying NVDA is safe, because of that earnings growth rate? The statistics outlined above would suggest the answer is yes, but this market is so hyped over NVDA’s GPU chips that it may have already priced 100% growth in EPS this year. How much higher do NVDA’s earnings this year need to rise to become “surprising?” What any super-charged stock from one-year needs is the ability to outearn or out-grow its most optimistic estimates. Otherwise, it may fall into the underperforming bucket, along with the majority of its peers.
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