Bet on Companies With High Year-to-Date Returns

Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In the first half of 2013, the U.S. equity markets have shown one of the best returns since 1998. The Dow Jones Industrial Average, or DJIA, has shown a year-to-date (YTD) return of around 18.6%, while the S&P 500 posted around 18.9% in YTD returns. One of the reasons for this impressive performance is the positive economic scenario. The U.S. economy has been growing at a steady rate, monetary policies are now stabilized and the housing industry is in recovery.

In this article, I have analyzed three companies that have outperformed DJIA and S&P 500 in YTD returns. These companies are from the technology, oil-and-gas, and home-improvement industries. With the tech companies going through a period of innovation, oil and gas companies in an expansion phase, and housing companies on the path to recovery, it would be interesting to see what potential these companies hold for investors. 

<table> <thead> <tr><th> <p><strong>Company</strong></p> </th><th> <p><strong>YTD Returns</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Google <span class="ticker" data-id="203768">(NASDAQ: <a href="http://caps.fool.com/Ticker/GOOG.aspx">GOOG</a>)</span></strong></p> </td> <td> <p>28.74%<strong></strong></p> </td> </tr> <tr> <td> <p><strong>Halliburton <span class="ticker" data-id="203806">(NYSE: <a href="http://caps.fool.com/Ticker/HAL.aspx">HAL</a>)</span></strong></p> </td> <td> <p>29.95%<strong></strong></p> </td> </tr> <tr> <td> <p><strong>Lowe's <span class="ticker" data-id="204349">(NYSE: <a href="http://caps.fool.com/Ticker/LOW.aspx">LOW</a>)</span></strong></p> </td> <td> <p>25.79%</p> </td> </tr> </tbody> </table>

Migration to new platform in paid search

Google rolled out changes to its advertising segment called Enhancement Campaigns, or EC. Google EC will improve ad context and bidder management by tailoring use for different times, locations, and devices. This will help the company increase mobile advertisement revenue; this year, mobile is expected to contribute around 26% of total searches, rising from 15% last year.

The online advertising market was worth $99 billion in 2012, and it is estimated to reach $113.5 billion in 2013. Google occupies 45% of the total market share, and its search business revenue is expected to grow by around 15%-20% in fiscal year 2014.

In June 2013, Google acquired Waze for $1.03 billion, outbidding its competitors Apple and Facebook. Waze is an Israeli mobile application maker that generates revenue through advertisement. It creates applications that generate maps and traffic data, helping users to avoid traffic, congestion, and police barricading. Waze is just four years old and has 50 million users. Google can generate $90 million of annual revenue from Waze after integrating Waze's ad platform with its own. Waze’s user base has the potential to increase to 115 million users by 2014, boosting Google’s ad revenue.

Horizontal drilling holds the key to the future

Halliburton announced a $70 million investment in a sand-distribution center and operating base in the Niobrara oil play. This will service Noble Energy's horizontal wells in the region, which are set to increase from 200 wells in 2012 to 300 wells in 2013 and 500 wells in 2016. Vertically drilled wells recover natural gas from only the well’s immediate surroundings; horizontal wells recover natural gas from the entire drilled region.

The overall average cost of horizontal drilling is $4.8 million per well compared to $0.6 million per well of vertical drilling. Halliburton's revenue from Noble will be around $1.5 million per well which will amount to around $450 million this year. Total exploration and production spending in this region will increase by 24% because of rising horizontal drilling. Halliburton’s strong presence in this basin will benefit the company. 

To improve its operations and quality of service, Halliburton initiated the “Battle Red” project, which it will complete in the first quarter of 2014. It will cost $10 million-$12 million per quarter to implement it, and will enable the company to use electronic signatures in the field to take orders. With help of SAP, this will standardize the order-to-cash system, eliminating inefficient days between order delivery and the billing day. Order-to-cash system refers to the cycle of receiving an order through to its fulfillment. This project will go online in the third quarter of 2013. A one-day improvement can generate working capital of $80 million on an annual basis, improving the company’s margin.

Orchard acquisition to expand into California

Lowe's announced an asset exchange agreement with Orchard Supply Hardware; it will take control of Orchard's assets for $205 million in cash and $87 million in payables, and the deal should close in three months. Lowe’s will acquire at least 60 stores out of Orchard’s total 91 stores, raising Lowe’s store count to at least 170 in California. Lowe's has a limited presence in California compared to its primary competitor, Home Depot, which has 234 stores in the state. Due to low mortgage rates and housing recovery, demand for home improvement products is going to increase. Orchard generated around $657 million last year. This is around 1% of Lowe’s sales this year, which isn’t a significant contribution, but it will improve with the help of rising scale.

Additionally, the company is reviewing all of its product lines and plans to cut about $300 million of inventory by 2015. It has already reviewed 50% of its product lines and has achieved 1% increase in gross margin in the first quarter of 2013. It has also reduced its production cost through vendor negotiations and increasing labor productivity in stores. The company will generate average free cash flow of around $3.8 billion per year, allowing for increased share buybacks. The company will reduce around 10% of its market cap through buybacks of around $13 billion from fiscal year 2013 to fiscal year 2015. These buybacks will result in EPS growth of around 10% annually through 2013-2015. 

Conclusion

These companies are implementing different strategies to maintain their stock growth. Thus, the share prices of these companies should continue to outperform the market due to sound fundamentals. Google has launched a new and improved advertising platform that will increase advertising revenue in the future. The acquisition of Waze will also help expand its customer base and bring more revenue to the company.

With changing inclination towards horizontal drilling in the Niobrara play, Halliburton will benefit due to its new sand-production center. I recommend buying both these stocks

Lowe's is trying to match its biggest competitor, Home Depot, through its acquisition of Orchard. Although the plans are concrete, it will take time to materialize and match up to Home Depot. I recommend holding this stock. 

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Madhukar Dubey has no position in any stocks mentioned. The Motley Fool recommends Google, Halliburton, and Lowe's. The Motley Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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