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Five Best Hot Stocks of 2012

Posted
1/8/2013 3:44:00 PM
By: Cabot Heritage Corporation
Referenced Stocks:VIPS

The Five Hottest Stocks 2012 Had to Offer

All the Big Winners of 2012

A Chinese Online Retailer That's Flying

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One way growth investors enjoy torturing themselves is to look at the outsized gains made by stocks that they didn't own. This is a nice way to celebrate the New Year, and prevents us from developing too elevated an opinion of our own abilities.

2012 was a little above average in terms of the number of stocks that posted unusually large gains, and I'd like to tell you about a few.

This isn't really a way to tempt you to chase these kinds of gains. If there's any lesson that a list of big winners teaches, it's that outsized gains come from a variety of sources, most of which are only apparent in retrospect. The philosopher who said that life can only be understood backward, but must be lived forward, had the right idea. I have a few generalizations about how gains of 200% or more come about, but first, here are the biggest winners of 2012. I got this list by screening all stocks that trade on U.S. exchanges that had a price at year-end over 10, and that traded an average of at least 50,000 shares traded per day for the last 50 days of the year.

Impac Mortgage Holdings (IMH, +601%) - Impac is a mortgage and real estate company whose stock used to trade at 280 back in 2004. But the mortgage crisis dropped the stock into penny stock territory in early 2009. After rallying to 6 by the end of 2009, IMH spent 28 months drifting lower, entering August 2012 trading at around 2. At that point, investors became aware that the company might be making progress in clearing the liability claims against it and they piled in. IMH soared to as high as 18 in November, and finished the year at 14. The lesson here is that good news can produce quick results.

Sarepta Therapeutics (SRPT, +477%) - Biopharmas are always strong candidates for top stocks of the year, as one good product can transform a money-losing business into a hot property in a day. Sarepta hasn't stopped losing money yet, but news in July about promising results for the company's RNA-based therapy for Duchenne muscular dystrophy gave SRPT a huge shot in the arm. This halted the bouncy downtrend that's dominated the stock's chart since 2000.

Security National Financial (SNFCA, +466%) - Security National Financial is another rocket shot from the financial sector. The company sells life insurance, cemetery and mortuary services and mortgage loans. Like Impac Mortgage, SNFCA started the year low (trading at about 1.4) and slow (sometimes trading as few as 300 shares a day). The turn came in August, when the stock gapped up and just kept going. After riding a crest of rising volume, the stock topped 10 in December.

Ellie Mae (ELLI, +391%) - Ellie Mae, a provider of electronic mortgage origination services, brings the biggest theme of 2012 (the rebound in housing, mortgages and real estate) into sharper focus. ELLI has only been public since April 2011, and the stock mostly languished after its IPO, finishing 2011 at a tepid 5.6. But 2012 brought a steady advance that began with the new year and hit its peak in September, when the stock nudged 30. ELLI finished the year above 28, making a nice consolidation for its outsized gains.

Infinity Pharmaceuticals (INFI, +296%) - Infinity Pharmaceuticals completes the sweep for mortgage/financials and pharmas as top stocks of the year. Like Sarepta, Infinity began the year with no earnings and no products. Also like Sarepta, the company finished the year with no marketable products, but with its first positive quarter of earnings (52 cents per share in Q3). The company's lead product candidates address uncommon cancers, and clinical trial results have been enough to encourage larger companies to pony up development money. INFI is unusual in that it survived a 40% correction in late January and still wound up in the top five for the year.

I'm sorry to say that there's no way for a responsible growth investor to get much leverage in pursuing the outsized results represented in this elite group. Investing in a downtrodden sector is fine, as long as you have some idea that a turnaround is on the way. But like the economist who was famous for predicting seven of the last three recessions, those who predict turnarounds usually have a very rocky success rate.

Growth investors who use the Cabot growth disciplines look for a combination of positive market conditions and companies who are making money whose stocks are already in confirmed uptrends. While it's tempting to try to snag a stock at its bottom, those stocks can hug that bottom for a lot longer than you think possible.

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My stock pick today is a company that has many of the earmarks of a potentially big winner. It's Vipshop Holdings ( VIPS ), a Chinese online retailer that specializes in flash sales, the kind of online offerings that last only for one day, or even for just as long as inventory lasts.

Vipshop Holdings was founded in 2008, and has marketing partnerships with over 360 brands, which allows goods to be offered at discounts of 50% to 70% off original retail. The company's online presence makes it essentially the first national off-price retailer in China, since there are no TJ Maxx or Marshalls chains there.

Revenue growth has been enormous, which is what happens when you start from zero. Revenue growth was over 1,000% in 2010 and nearly 600% in 2011. And the company just booked its first quarter of positive earnings (a penny per share) in Q3, a quarter that featured revenue growth of 197%. VIPS came public at 6 in March 2012 and put in a five-month post-IPO base. But when the breakout came in August, the stock showed some real speed. VIPS is now trading at 18 and volume has been robust.

I have VIPS on the watch list for the Cabot China & Emerging Markets Report, waiting for a suitable pullback to provide a buy point. The stock just spent nine days trading under resistance at 18, which may be the pause I've been looking for. I think VIPS is buyable on any breakout above 18, especially if volume is above average.

All the best,

Paul Goodwin
Editor of Cabot China & Emerhing Markets Report
And Cabot Wealth Advisory