Ask the Expert: Killer Returns vs. Killer Stocks

Killer StocksQ: What exactly is meant by "best-performing stock"?

A: A best-performing stock is the one that has delivered the highest total return to shareholders over a set period of time. For example, online travel booking Priceline.com (PCLN) is the best-performing stock among the S&P 500 over the past year, up a whopping 195%.

Optimists will say that a stock ranks among the top performers because the business is firing on all cylinders. Sales are up, so are profits, and the future looks bright. In Priceline.com's case, sales are up 35% over the past year, its international business is booming, and all signs point to the company having a long growth runway ahead.

A more glass-is-half-empty perspective, though, is that a stock usually has to start out down in the dumps in the first place in order to score such a big turnaround.

For example, the best-performing stocks coming out of the financial crisis in March 2009 were banks, which were among the worst-performing stocks over the previous year. In that sense, nabbing best-performing stock honors is less like winning Most Valuable Player and more like being voted Most Improved. And, sure enough, Priceline.com's stock had stumbled in spring 2010, setting the stage for an even greater recovery.

Be sure to dig into the story behind the soaring stock charts before buying shares. While the stock's killer performance might be because the business is kicking butt and taking names, there's also a chance Mr. Market has gotten ahead of himself and assigned too high a value to the shares.

The bottom line: If you're confident in the company's fundamentals and long-term prospects, biting the bullet and buying shares of a rising business could make sense even if the stock is already off to the races. If you're a cheapskate with a contrarian bent like me, though, you might want to wait until the stock cools off a bit before starting to nibble. Patience pays.

Joe Magyer is a senior analyst at The Motley Fool. He enjoys mint juleps and self-referential humor.


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