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2014's Biggest Stock Winners: Is There Any Gas Left in the Tank?

Declining fuel prices stoked great returns at several of these companies, but that's not a lasting advantage.

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For many investors, the U.S. stock market's robust performance in 2014 was a welcome surprise. At the outset of 2014, readers predicted a gain of just 6.5% for stocks for the year, but the S&P 500 went on to gain twice that much. 

The technology, health-care, utilities, and real estate sectors led the way, with each gaining about 20% for the year. And some companies downright knocked the cover off the ball, returning 75% or, in some cases, doubling investors' money during the year. 

But last year's biggest winners wouldn't necessarily make for a great shopping list, according to Morningstar's equity analysts. In fact, among the analyst-rated companies with 2014 returns of 50% or more, just one--drugmaker  Actavis (ACT)--currently earns a Morningstar Rating of 4 stars or higher. Meanwhile, most of the market's best-performing stocks in 2014 hover in 1- or 2-star territory. Worse, several of them do not have economic moats, in our analysts' view--meaning that competitors could easily swoop in and usurp their territory. In particular, declining fuel prices spurred rising stock prices in the airline and trucking industries, two price-competitive business types with low to no customer switching costs where it's next to impossible to carve out a sustainable competitive business advantage. 

Here's an overview of the rated companies that earned returns of 75% or more last year, as well as a capsule discussion of their forward-looking prospects. 

 Allergan (AGN)
2014 Return: 91.56% | Morningstar Rating: 3 Stars | Economic Moat Rating: Wide
Allergan shares nearly doubled in value in 2014, as the maker of Botox was initially pursued by hostile suitor  Valeant Pharmaceuticals (VRX) and eventually Actavis. In November 2014, Actavis announced it would be acquiring Allergan at $219 per share, in a $66 billion deal that's expected to close in the second quarter of 2015. (Actavis itself enjoyed big gains in 2014--albeit not of the magnitude of Allergan's--but actually appears attractively valued right now, earning a 4-star rating.) Analyst Michael Waterhouse assigns Allergan a wide moat rating, citing its strong brand recognition and product innovation capabilities. However, the stock is currently trading just a hair below Waterhouse's estimate of fair value and Actavis' acquisition price, meaning its upside potential could be muted. 

 Edwards Lifesciences (EW)
2014 Return: 93.70% | Morningstar Rating: 2 Stars | Moat Rating: Narrow
Shares of this medical-device maker, which specializes in heart valves, soared in 2014, owing to several positive earnings surprises. Analyst Debbie Wang notes that the firm's focus on efficiency and higher-margin products has helped plump margins, and she has assigned Edwards a narrow moat rating for its dominance in tissue heart valves. And while Wang bumped up her price target in 2014, in part because of the successful rollout of the firm's Sapien transcatheter aortic valve, the stock is still trading well above her fair value estimate of $97 a share. 

 Electronic Arts (EA)
2014 Return: 104.95% | Morningstar Rating: 1 Star | Moat Rating: Narrow
Video game maker Electronic Arts surprised on the upside in 2014, exceeding management's earnings guidance, thanks to growth in its mobile and online-gaming segments. And the firm's dominance of the sports genre of the video game industry earns it a narrow moat rating; EA has a nearly 50% market share within the genre. But at nearly $47 a share, Peter Wahlstrom, Morningstar's director of equity research in the global technology and media sectors, thinks the stock has gotten ahead of itself; he puts its fair value at $28. 

 Knight Transportation (KNX)
2014 Return: 84.84% | Morningstar Rating: 1 Star | Moat Rating: None
Lower gas prices are a boon to consumers, but they also provide a tailwind to the trucking industry, which enjoyed a banner year in 2014. Knight outperformed other firms in its industry, thanks in part to its long-standing focus on efficiency and cost controls. But analyst Matthew Young says that even the best-managed firms will have trouble earning a moat in the trucking industry; it's a capital-intensive business with low switching costs and a high level of price competition. Moreover, Knight is currently trading about 50% higher than Young's fair value estimate of $19. 

 Mallinckrodt (MNK) (
2014 Return: 89.49% | Morningstar Rating: 2 Stars | Moat Rating: None
The specialty and generic drugmaker industry notched tremendous gains in 2014, with the typical company in that industry gaining nearly 50%. Generic drugmaker Mallinckrodt shot out the lights. But in contrast with the branded pharmaceutical market, where margins are often lush when drugs are still on patent, companies in the generics industry compete on price, and true economic moats are difficult to come by. Analyst David Krempa asserts that Mallinckrodt, as a smaller player within the generics space, doesn't have the scale to compete with giants such as  Teva (TEVA) and  Mylan (MYL). The stock's valuation isn't attractive, either, trading well above Krempa's $72 fair value estimate. 

 Royal Caribbean (RCL)
2014 Return: 76.15% | Morningstar Rating: 2 Stars | Moat Rating: None
Cruise lines are another industry that benefits from lower energy prices, and the major cruise operators also got a boost from rebounding consumer spending in 2014. Stock analyst Jaime Katz assigns Royal Caribbean a narrow economic moat rating, noting that it and the two other major players in the cruising industry-- Carnival (CCL) and  Norwegian Cruise Lines (NCLH)--control 90% of the North American cruise market. That, plus the capital-intensive nature of the cruise business, makes it unlikely that an upstart competitor would encroach on their dominance. That said, Royal Caribbean is trading above Katz's $70 per share price target right now; Carnival and Norwegian appear somewhat more attractively valued, landing in 3-star territory currently.

 Skyworks Solutions (SWKS)
2014 Return: 155.81% | Morningstar Rating: 2 Stars | Moat Rating: None
Skyworks, which makes radio frequency chips used in smartphones, is benefiting from consumers' transition away from basic cellphone handsets and into smartphones. The firm generated outstanding 2014 earnings, in part because its chips are used in  Apple's (AAPL) iPhones, including the new iPhone 6. But senior analyst Brian Colello is reticent to assign Skyworks a moat, noting that handset makers have historically split their business among multiple makers of radio frequency chips to avoid giving any one manufacturer too much power. Colello also thinks the stock has gotten a bit ahead of itself, currently trading more than $20 higher than his $47 fair value estimate. 

 Southwest Airlines (LUV)
2014 Return: 125.80% | Morningstar Rating: 3 Stars | Moat Rating: None
Like truckers and cruise-line operators, airlines are big beneficiaries of lower energy prices. Thus, the airline industry had a tremendous year in 2014, with the typical company gaining more than 60%. But low fuel prices could be a fleeting advantage, and at the end of the day, Morningstar deems the airline industry a no-moat business. Senior analyst Neal Dihora points out that it's extraordinarily price-competitive and customer switching costs are nil. That said, Southwest may win customer loyalty by having fewer "nuisance fees," such as charges for checked bags, and it's not the most egregiously overvalued stock on this list, even after its strong returns over the past three years. 

 United Continental Holdings (UAL)
2014 Return: 76.82% | Morningstar Rating: 2 Stars | Moat Rating: None
Like Southwest, United Continental Holdings has benefited from low fuel prices. Senior analyst Neal Dihora notes that the firm has also improved profitability by levying various fees on passengers, from baggage charges to fees for extra legroom. He points out that the firm's revenues from these fees are growing, and the fees tend to have very high margins. Yet, his overarching thesis on the industry is that fliers are exceptionally price-sensitive and barriers to entry in the airline industry are low, making it difficult for any airline to earn a moat. And while Dihora bumped up his airline price targets to account for the fact that declining energy prices will be a tailwind, United Continental is still trading above his estimate of fair value at the moment.

Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.