The Nasdaq Composite Index (^IXIC) has gained 14.1% so far in 2014. Though short of the 38.3% gain in 2013, the Nasdaq has outperformed the Dow Jones Industrial Average (DJI) and the Standard & Poor 500’s (INX) year-to-date returns of 8.7% and 12.7%, respectively.
The Nasdaq has been boosted by encouraging GDP data, an improving labor market and the Federal Reserve’s assurance that it would be ‘patient’ before hiking rates. The index also gained 5.5% in the first half of 2014 despite severe winter weather that resulted in a decline in first quarter GDP.
The index was able to withstand several international concerns too. These include geopolitical tensions in Ukraine, violence in the Middle East, political unrest in Greece, discouraging economic reports from China and Eurozone, technical recession in Japan and slump in crude oil prices.
Quarterly Performance
The Nasdaq Composite index has gained more than the blue-chip index in all four quarters this year. The index also gave better returns than the S&P 500 in three out of four quarters as evident from the following diagram:
|
Quarters |
Nasdaq Composite |
S&P 500 |
Dow |
|
1Q14 |
0.5% |
1.3% |
-0.7% |
|
2Q14 |
5.0% |
4.7% |
2.2% |
|
3Q14 |
1.9% |
0.6% |
1.3% |
|
4Q14 * |
6.1% |
5.6% |
5.8% |
* Returns as of Dec 23, 2014
First Quarter: The tech-laden Nasdaq slipped 1.7% in January. Weak manufacturing data from China, political and economic concerns emanating from emerging markets, and apprehensions that the Fed may trim its stimulus plan dealt a heavy blow to investor sentiment. However, the index gained 4% in February, registering its best monthly gain since Jan 2013. The Nasdaq again dropped 2.5% in March, its worst performance since Oct 2012.
Second Quarter: Intense selling pressure in bio-tech and Internet stocks dragged the Nasdaq down 2% in April. However, resurgence in bio-tech stocks helped the index increase 3.1% in May. May’s gains helped the Nasdaq turn positive for the year. The index also gained 3.9% in June following the Fed’s commitment to continue with low interest rate for a “considerable time.” The European Central Bank’s stimulus measures to boost the Eurozone also improved investor sentiment.
Third Quarter: The Nasdaq dropped 0.9% in July. Escalating geopolitical tensions in Gaza, reports that a Malaysian Airlines passenger jet was shot down near the Ukraine-Russia border and Fed’s comments about “substantially stretched valuations” in Internet and bio-tech stocks had sparked concerns among investors. However, encouraging domestic economic data helped the Nasdaq gain 4.8% in August.
Heightened geopolitical tensions in Hong Kong, concerns about Scottish independence vote and announcement of tighter-than-expected tax inversion rules adversely affected the index in September. The Nasdaq lost 1.9% in September. Despite this setback, the index had gained for seven-straight quarters by this time.
Fourth Quarter: For October and November, the Nasdaq gained 3.1% and 3.5%, respectively. Upbeat earnings results from retailers and favorable US midterm election results boosted the markets. However, the index has entered the red in December as plunge in crude prices continued to affect broader markets.
Positive Economic Data
Strong second and third quarter GDP numbers of 4.6% and 5%, respectively, ensured Nasdaq remain in green. The economy also added the most number of jobs in November since Jan 2012. The economy added a minimum of 200,000 jobs for 10 straight-months in November, the longest stretch in more than 30 years. Meanwhile, unemployment rate remained at a six-year low of 5.8%.
Favorable Fed Policy
The Nasdaq was negatively impacted in July after the Fed’s monetary policy report raised concerns about valuations of social-media and bio-tech companies. The report stated: “Valuation metrics in some sectors do appear substantially stretched, particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year.” This resulted in a decline in Internet and bio-tech stocks.
Nevertheless, Fed's decision to remain ‘patient’ before raising the key interest rates from near zero level boosted broader markets. Fed also assured that rate hikes will be methodical and believes that increase in interest rates may happen sometime in 2015.
Tech Enjoys Broad-based Gains
The technology sector enjoyed broad based gains in 2014 that helped the Nasdaq move north. Positive results from semiconductor stocks, Internet services and cloud computing providers improved sentiment. Further, collaborations in the technology sector have helped companies to get competitive, avoid litigation and tap growth opportunities.
On a year-to-date basis, the Technology SPDR (ETF) gained 18%, the third highest among the S&P 500 sectors. Key technology stocks listed on the Nasdaq including Apple Inc. (AAPL) and Microsoft Corporation (MSFT) have year-to-date gains of 40.4% and 29.5%, respectively. However, Google Inc. (GOOGL) has incurred a year-to-date loss of 3.9%.
Apple’s upcoming Apple watch and Apple pay are expected to boost the company’s top-line. Partnership with China Mobile Limited (CHL) and IBM Corporation (IBM) will also boost the company’s profitability. Microsoft’s “cloud-first mobile-first” approach, new subscription model, Azure and encouraging new products are expected to generate sizeable cash flows. Google’s search engine market share is a big positive. Its focus on innovation, acquisitions and Android OS should generate strong cash flows.
Bio-Tech Stocks Shine
Rally inbio-tech stocks also helped the Nasdaq. Several new drugs gained approval from the Food and Drug Administration. Additionally,an increase in healthcare spending propelled gains for bio-tech stocks in 2014. The Affordable Care Act (“Obamacare”) and an aging population significantly contributed to a rise in healthcare spending.
Meanwhile, at the annual meeting of the American Society of Oncology in Jun 2014, biotech companies came up with encouraging data on approved products as well as pipeline candidates. Amid all these, the Ebola outbreak has brought Tekmira Pharmaceuticals Corp. (TKMR) and Chimerix, Inc. (CMRX) into the spotlight for their experimental Ebola disease treatments.
However, the Nasdaq dropped to its lowest levels in five weeks on Sep 23 after the U.S. Treasury Department introduced new tax inversion rules, aimed at deterring companies that have already entered into acquisition deals in order to take advantage of tax inversion. This hampered new deals in bio-tech space. Nevertheless, the biotech sector recovered with the NASDAQ Biotechnology index delivering a year-to-date return of 29.8%.
Top 5 Nasdaq Performers
Given below are the top 10 performers:
|
Company Name |
YTD |
|
RadNet, Inc. |
432.33% |
|
Agios Pharmaceuticals, Inc. |
404.30% |
|
Avanir Pharmaceuticals, Inc. |
404.17% |
|
OvaScience, Inc. |
396.72% |
|
Green Brick Partners, Inc. |
392.98% |
|
Receptos, Inc. |
370.61% |
|
Achillion Pharmaceuticals, Inc. |
366.71% |
|
bluebird bio, Inc. |
328.50% |
|
TG Therapeutics, Inc. |
324.36% |
|
SMTP, Inc. |
318.17% |
We will now pick 5 top Nasdaq performers based on impressive Zacks Rank, favorable forward price to earnings ratio (PE), positive current year estimated growth rate and year-to-date returns. The favorable Zacks Rank should help these stocks continue gaining in 2015 as well.
RF Micro Devices Inc. (RFMD) is engaged in the design, development, and marketing of radio frequency (RF) solutions for original equipment manufacturers in the United States. The company has returned 215.9% year to date.
Current year estimated EPS growth rate is above 100%. It carries a Zacks Rank #1 (Strong Buy) and the forward PE currently stands at 16.4x.
Planar Systems Inc. (PLNR) develops, manufactures, and markets electronic display products and systems. The company has returned 183.1% year to date.
Current year estimated EPS growth rate is 60.3%. It carries a Zacks Rank #1 (Strong Buy) and the forward PE currently stands at 21.7x.
Skyworks Solutions Inc. (SWKS) designs, develops, manufactures and markets analog and mixed signal semiconductors worldwide. The company has returned 157% year to date.
Current year estimated EPS growth rate is 43.4%. It carries a Zacks Rank #1 (Strong Buy) and the forward PE currently stands at 18.6x.
Avago Technologies Ltd. (AVGO) is engaged in the design, development and supply of analog semiconductor devices with a focus on III-V based products. The company has returned 90.6% year to date.
Current year estimated EPS growth rate is 46.7%. It carries a Zacks Rank #1 (Strong Buy) and the forward PE currently stands at 15.2x.
Horizon Pharma plc (HZNP) is a specialty pharmaceutical company that develops and commercializes medicines for the treatment of arthritis, pain and inflammatory diseases. The company has returned 60.8% year to date.
It boasts a strong current year EPS estimated growth rate of more than 100%. It carries a Zacks Rank #2 (Buy) and the forward PE currently stands at 16.1x.
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