There's certainly nothing wrong with investing in companies that manufacture the products you see, buy and use every day. But, this year's best-performing stocks are anything but household names. If you didn't buy them just because you weren't familiar with them, you would have missed out on the average 54% gain they've doled out for the year so far. Good news though - several of these stocks still have plenty of gas left in the tank.
And what are these off-the-radar goodies? Internet service providers - but not the ones that would quickly come to mind like AOL, or the broadband service you're receiving from your local cable or telephone company. The ISP stocks that have been this year's home runs are of companies delivering internet services - and several ancillary services - to corporations with some heavy-duty telco needs.
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Leaders of the Pack
As was said above, the pure internet service providers have dished out a 54% gain so far this year. That's not the absolute tops, but it's third out of more than 200 industry groups.
As for which is these names did the bulk of the heavy lifting, F5 Networks (Nasdaq:FFIV) takes the top honor. GlobalScape (NYSE:GSB) is the runner up, though it's been a little less impressive of late. While it's a little further down the YTD performance list, Commtouch Software (Nasdaq:CTCH) deserves a mention; the company has been closing the gap between it and the leaders recently.
Their performance, however, is a secondary point. The bulk of the interest is in whether or not these companies can continue to incite this degree of accumulation. Simply put, yes, the business model can and will spur more growth.
The Secret of Their Success
Technology is no longer a pure cyclical/growth industry. (To learn more, see The Ups And Downs Of Investing In Cyclical Stocks.) Oh, there are still tech names of the ilk. Just as common, however, are the technology companies that are built to plant revenue-bearing seeds and draw that revenue no matter how well or poorly the economy is doing. The key is just planting more cash flow seeds, from which more earnings can be scraped off.
Oracle (Nasdaq:ORCL) is one such example. As a database and database support provider, its customers have become so dependent on Oracle's service, it's a virtual impossibility to part ways with the company now. Of course, it just so happens that Oracle bills for those services on a monthly basis.
Online gaming stocks are another good example; they collect a nominal monthly fee from all their players, but with enough players paying in, the number can really add up.
In a similar sense, F5 Networks, Commtouch Software and AboveNet (Nasdaq:ABVT) have become such an everyday piece of the puzzle for their customers, the billing/cash flows have become practically automatic.
Proof of the Pudding
While AboveNet's per-share earnings started to taper off in the second quarter of 2009, the fact that the company was able to move from earning 14 cents per share in Q1 of 2008 to $1.11 in Q1 of 2009 (with a sequential earnings increase in three of those four quarters, in the middle of the recession) leaves little to be not appreciated. Either way, earnings growth is underway again.
And what service does AboveNet provide? Internet connection solutions to corporations, including communication companies. Boring? Yes. Optional? Probably, but the company managed to sell the billable service in rough economic times anyway. The benefit of recurring revenue becomes even clearer with Commtouch and F5, however.
Though F5 didn't do quite as well in 2007 as it did in 2006 (an EPS of 90 cents versus an EPS of $1.02), don't lose sight of the fact that since the beginning of 2007, the company has grown earnings on a sequential basis in 10 of the last 13 quarters, and not once posted a losing quarter. In fact, 2009 was a record-earnings year, and 2010 is on pace for the same.
Commtouch actually swung to a profit in 2007 (heading into the recession), and matched that earnings of 8 cents per share in 2008 (smack dab in the middle of the recession). Earnings doubled in 2009.
The Bottom Line
Given what these outfits did in troubled times, and now seeing them bloom when things are just marginally better (growth forecasts are more than tasty) it's no wonder these names are off and running. Investors hit this one dead center.
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