S&P 500 Stocks With the Potential to Outperform in 2025

S&P 500 index stocks with characteristics of past top performers were shown in the January 2024 First Cut. The AAII Journal article was based on Martin Fridson’s book “The Little Book of Picking Top Stocks: How to Spot Hidden Gems” (Wiley, 2023). I updated the list this week.

Fridson analyzed the S&P 500’s previous best-performing stocks to determine if there were common traits among them. He identified five such traits: a high level of dispersion in analysts’ estimates, smaller relative size for large-cap stocks, relatively high levels of volatility, below-top-notch credit ratings and a catalyst to cause the price to move.

I screened for dispersion in earnings estimates, size and volatility. Credit ratings were pulled from the Moody’s website. There isn’t a way to quantitatively screen for catalysts. Nonetheless, several big winners were found. Through yesterday morning, United Airlines Holdings Inc. (UAL) jumped 132% over the past 12 months, Targa Resources Corp. (TRGP) surged 115%, Fair Isaac Corp. (FICO) gained nearly 91% and NRG Energy Inc. (NRG) powered up by more than 89%.

Fridson cautioned that stocks with the potential to have a great year also have the potential “to have a very bad year.” Such was the case with oil and gas companies APA Corp. (APA) and Devon Energy Corp. (DVN). The two stocks respectively lost 38% and 24% of their value over the past 12 months. Albemarle Corp. (ALB) dropped 31% due to falling commodity prices. Constantly swinging for the fences will lead to your share of strikeouts.

Overall, eight of the stocks listed in the January 2024 First Cut article have outperformed the S&P 500 over the past 12 months. The average return for the passing stocks was 21.5%, versus the S&P 500’s return of 26.6% through Tuesday, December 10. As noted above, we could not screen for catalysts. Including this step from Fridson’s list may have weeded out some of the underperformers.

I ran the screen this week to identify stocks with the potential to be the S&P 500’s top performers. I then removed stocks rated A or better by Moody’s, as well as those not rated by the credit agency. This left 24 stocks with traits of past top-performing S&P 500 stocks. While there are some carryovers, most of the companies on this list didn’t appear on the January 2024 list.

The strategy behind the screen is speculative. Fridson suggested putting no more than 1% or 2% of your portfolio into a stock you believe could be next year’s top performer in the S&P 500.

Alternatively, you could use the list as a starting point to identify stocks that may be worth holding for longer. This would require spending time examining the stocks’ underlying fundamentals and valuations—factors that the screen does not consider.