All four IBO Stock Indexes recorded strong double-digit gains in 2013 to end at record levels. Returns for the IBO Stock Indexes were the strongest since 2009, following the recession.

Just as strong were US equity markets, which celebrated one of their best years ever and the best returns in six years despite modest economic growth. Notwithstanding a slight reduction in its monthly bond purchasing program at the end of the year, the US Federal Reserve provided sufficient quantitative easing and maintained exceptionally low interest rates to incite consumer confidence and lure investors into riskier assets. Economic data improved throughout the year, including a stronger housing market and lower unemployment rate. As a result, the Dow Jones Industrial Average and S&P 500 grew 26.5% and 29.6% for the year to 16,576.66 and 1,848.36, respectively. Both indexes closed at record highs. The NASDAQ jumped 38.3% to 4,176.59, but remained well below its all-time high set in March 2000.

Despite weakness in government and industrial markets, most IBO Stock Index companies recorded either steady organic revenue growth or improved orders for the first nine months of the year. Certain companies benefited from demand in emerging and applied markets, stimulus spending in Japan, strong diagnostics sales and new products. A number of companies also maintained cost saving measures and stock repurchases to improve earnings results.

In 2013, all four Indexes posted strong double-digit gains, led by the Laboratory Instrumentation Stock Index, which jumped 47.2% to 975. 08. Seventeen of the Index’s 19 companies increased in value, led by Pacific Biosciences, which soared 208%. Only Sequenom and Transgenomic traded lower, as shares declined 50% and 25%, respectively. The Lab Consumables/Equipment Stock Index advanced 37.3% to end the year at 900.56, with all eight companies trading higher.

Life Technologies recorded the largest price increase, as shares advanced 55% due to its pending acquisition by Thermo Fisher Scientific (see IBO 4/15/13). The Diversified Instrumentation Stock Index grew 36.4% to 215.81 for the year. All eight companies increased by double digits, led by Teledyne Technologies, which rallied 41%. The Process/Metrology/Motion Instrumentation Stock Index advanced 36.4% to 772.14. Five companies recorded higher returns, while Zygo declined 6%. FEI expanded the most, climbing 61%.

Index Changes

There were several changes to the IBO Stock Indexes this year. SDIX was removed from the Process/Metrology/Motion Instrumentation Stock Index in April following the sale of its Life Science business (see IBO 4/15/13). Xylem was added to the Diversified Instrumentation Stock Index at the beginning of the year. NanoString and Cellular Dynamics International were added to the Laboratory Instrumentation Stock and Lab Consumables/Equipment Stock Indexes, respectively, in July following their IPOs. NanoString has gained 72% since its IPO on June 25 (see IBO 6/30/13), while Cellular has advanced 38% since its IPO on July 25 (see IBO 7/31/13).

Gainers and Losers

This year’s list of the top five gainers was chosen from the 41 companies in the four IBO Stock Indexes. The top five performers in 2013—Affymetrix, Fluidigm, Illumina, Pacific Biosciences and Thermo Fisher Scientific—were all part of the Laboratory Instrumentation Stock Index.

Pacific Biosciences and Affymetrix, which were among the largest decliners a year ago (see IBO 12/31/12), were the biggest turnaround stocks in 2013. Pacific Biosciences jumped 208% in 2013 to lead all companies among the IBO Stock Indexes. While sales for the first nine months declined 5.3%, the company stabilized revenues, reduced its cash burn rate and increased bookings for the PacBio RS II system. The company, which initially traded on the exchange in late 2010 at $16 a share (see IBO 10/31/10), faced questions regarding the accuracy of its next generation sequencing (NGS) technology, leading shares to a historic low of $1.10 in 2012. However, the firm addressed accuracy issues and signed an exclusive deal with Roche for its systems and consumables products for clinical applications (see IBO 9/30/13).

Similarly, Affymetrix, which fell 22% in 2012, regained investors’ confidence with a new reorganization plan to sustain profitability and focus on higher growth molecular diagnostics and translational medicine markets. The company beat analysts’ adjusted EPS consensus for each of the first three quarter due to strong sales of cytogenetic products. Affymetrix also improved its balance sheet by reducing its debt and lowering interest payments through refinancing. As a result, shares climbed 170% for the year.

Fluidigm and Illumina were the next highest growing stocks in 2013, as both companies recorded strong double-digit sales growth for the first nine months and raised full-year guidance in October. Fluidigm, which soared 168% for the year, experienced strong demand for single-cell genomics instrumentation and for sample preparation consumables for targeted resequencing. Revenue grew 37% for the first nine months, and the company raised its full-year sales growth outlook to 32%–34% after a stronger-than-expected third quarter (see IBO 12/15/13). Despite expanding headcount, full-year adjusted EPS loss is projected to narrow by 17%.

Illumina, which led all companies in the Indexes a year ago, jumped 99% in 2013. The company expanded its technology leadership for NGS and continued to diversify its end-markets and geographies. The company grew revenues by 23% for the first nine months and exceeded adjusted EPS expectations for each of the three quarters. With a significant opportunity in the commercial health care market, the company received premarket FDA clearance for the MiSeqDx sequencing system in December.

Similar to Illumina, Thermo was among the list of the top five stock performers for the second consecutive year. While the company exceeded adjusted EPS expectations for the first three quarters, organic sales growth was relatively modest. The rise in valuation for Thermo was based on the impending acquisition of Life. Investors expect the combined companies to produce significant cash flow, operational synergies and stronger revenue growth. As a result of the forthcoming acquisition, Life gained 55% for the year.

Other companies in the IBO Stock Indexes to record price gains of 40% or more were Agilent Technologies, Becton Dickinson, FEI and Pall. Most of these companies exceeded analysts’ EPS expectations for the first three quarters of the year. Agilent reported strong results for the Life Science and Chemical Analysis segments, but was hindered by lower demand in the Electronics Measurement business, which will be spun-off in 2014 (see IBO 9/30/13). While adjusted EPS declined 8%, the company maintained a strong cash balance, providing it with financial flexibility. During the fiscal year, Agilent spent $900 million to repurchase roughly 20 million shares and increased its quarterly dividend. The company also authorized a new share repurchase plan to avoid dilution from equity compensation.

Becton recorded adjusted EPS growth of 12% for the fiscal year ending September 30, excluding the medical device tax. Earnings benefited from strong sales in emerging markets, margin expansion from operating efficiencies, acquisitions and share repurchases. The company repurchased $450 million of common stock for the fiscal year. Both Pall and FEI recorded increased demand in their life science businesses, but revenues were offset by lower industrial sales. However, FEI recorded strong cash flow, higher margins and increasing orders. Pall benefited from cost saving measures and higher demand for medical and pharmaceutical products. Two large diversified companies, AMETEK and Teledyne Technologies, also posted returns of 40% or more due to steady growth and rising earnings expectations.

This year, only three companies—Sequenom, Transgenomic and Zygo—declined in value. Sequenom slumped 50% for the year, as investors remained concerned about growing competition and payment collection issues for its MaterniT21test. The company also lost a patent ruling covering its non-invasive prenatal test. In spite of these concerns, the company more than doubled revenues for the first nine months and projected continued strength for its diagnostics services. Transgenomic shares fell 25% this year, as the firm recorded a 12% decline in sales for the first nine months and doubled its operating loss due to lower demand in the Laboratory Services segment and weaker margins. It also diluted the number of share outstanding by 26% due to a private placement. Zygo, which fell 6% for the year, recorded weak sales of metrology and optical subsystems due to lower demand from the semiconductor capital equipment sector.

Based on a three-year average, FEI had the strongest average annual return of 79%. Teledyne, Cepheid, Thermo and MTS Systems each recorded average annual gains of 30% or more.

International

New stimulus initiatives to boost the Japanese economy led the Nikkei 225 Index up 56.7% in 2013, its best performance in decades. Japanese manufacturing reached its highest levels in seven-and-half years. However, Asia Pacific indexes were mixed, as the Singapore STI Index was flat and the China Shanghai Composite declined 6.7% due to weaker demand and lower manufacturing. In spite of rising inflation and lower corporate spending, the India Sensex 30 Index advanced 9.0% due to improved economic expectations. All major European markets posted double-digit gains this year, led by the German DAX, which climbed 25.5% for the year. Britain’s FTSE 100 Index improved 14.4%.

Seventeen of the 21 international stocks in IBO’s stock table traded higher in 2013. All seven Pacific Rim companies increased in value, led by Precision System Science (PSS), which soared 443%. JEOL also posted a significant gain, climbing 117%.

In 2013, 10 European companies in the stock table advanced and four declined. Sartorius recorded the largest gain among the European firms, rising 75%, while Alpha MOS fell 23%. However, trading for Alpha MOS has been suspended since November 18 due to a Chapter 11 filing (see IBO 12/15/13).

Based on a three-year average return from 2011 to 2013, 18 of 21 international companies in the stock table recorded share gains. Over the three years, PSS, Sartorius and Porvair shares increased by an average annual return of 123%, 67% and 52%, respectively. Alpha MOS recorded the largest decline over the three-year period, falling by an annual average rate of 20%. For the same period, Exiqon declined by an annual average of 5% and Techcomp slipped 1% as calculated by its trading on the Singapore Exchange.

December

US equity markets soared in the final trading week of the year due to better-than-expected third quarter GDP growth, which was 4.1%, compared to previous expectations of 3.6% growth. In addition, US manufacturing in December expanded at its fastest pace in almost a year. The heightened economic confidence was enough to withstand the Federal Reserve’s $10 billion tapering of quantitative easing to $75 billion a month. For the month, the Dow, S&P 500 and NASDAQ grew 3.0%, 2.4% and 2.9%, respectively.

Three of the four IBO Stock Indexes traded higher in December, while the Process/Metrology/Motion Instrumentation Stock Index slipped 0.2%. The Laboratory Instrumentation, Lab Consumables/Equipment and Diversified Instrumentation Stock Indexes advanced 5.1%, 4.5% and 4.3%, respectively.

Laboratory Instrumentation Stock Index

In December, the Laboratory Instrumentation Stock Index climbed 5.1%. Sixteen companies improved and three contracted. NanoString enjoyed the largest increase, rising 46%, while Sequenom fell 11%.

On December 4, Thermo priced a four-part $3.2 billion senior note offering to help fund the purchase of Life. On the same day, Moody’s Investors Service designated a “Baa3” rating for the offering. Shares traded slightly lower. On December 10, NanoString announced that its new Prosigna Breast Cancer Prognostic Gene Signature Assay will be offered by several clinical labs and cancer centers beginning in the first quarter of 2014. Shares jumped 11.0% the next day. Robert W. Baird upgraded the company on December 11 from “Neutral” to “Outperform” and raised its price target on the company by 50% to $12 per share.

In other ratings changes, Macquarie upgraded PerkinElmer on December 10 from “Neutral” to “Outperform” and increased its price target by 13% to $45 a share. Cepheid was initiated with a “Market Perform” rating by JMP Securities on December 18, and started with a “Hold” recommendation by Needham & Company on December 19. JMP Securities initiated coverage of Illumina on December 18 with an “Outperform” rating and $125 price target.

Process/Metrology/Motion Instrumentation Stock Index

The Process/Metrology/Motion Instrumentation Index declined 0.2% this month, with two companies trading lower and four advancing. Veeco Instruments gained 2% to lead the Index, while Zygo fell 6%. The only rating change this month was for Nanometrics, which was downgraded on December 18 by Stifel Nicolaus from “Buy” to “Hold” due to valuation.

Laboratory Consumables/Equipment Stock Index

The Laboratory Consumables/Equipment Stock Index expanded 4.5% in December. Seven companies traded higher, led by Enzo Biochem, which jumped 19%. Kewaunee Scientific tumbled 12%, as the company reported lower fiscal 2014 second quarter sales and cautioned that US demand would remain challenged in the second half of the fiscal year.

Despite lower sales, Kewaunee reported on December 3 that fiscal second quarter EPS grew 12% to $0.28. Yet shares slumped 14.7% the next day. On December 10, Enzo narrowed its fiscal first quarter 2014 EPS loss by 22% to $0.07. Shares slipped 1.6% the next day. On December 18, JMP Securities initiated coverage of QIAGEN with an “Outperform” rating.

Diversified Instrumentation Stock Index

The Diversified Instrumentation Stock Index advanced 4.3% this month, with six companies in positive territory and two declining. AMETEK recorded the largest gain, rising 7%, while Mettler-Toledo dropped 2%. On December 16, Roper Industries raised its quarterly dividend by 21% to $0.20 per share, leading shares up 1.7%.

International Shares

In December, prices for five Pacific Rim companies declined and improved for two. Techcomp recorded the largest decline, sliding 10%, while Hitachi High-Technologies gained 10%. On December 26, PSS completed a 200-for-1 stock split.

This month, eight European firms traded higher and five contracted. Alpha MOS was unchanged due to the suspended trading. Oxford Instruments had the highest return, climbing 17%. Scientific Digital Imaging (SDI) fell 22%.

On December 4, Porvair preannounced better-than-expected sales growth of 10% for the fiscal year ending November 30. Yet shares fell 3.5% the next day. On December 9, Exiqon lowered its 2013 sales forecast by 3% to DKK 125–128 million ($22–$23 million) and projected an EBITDA loss of DKK 5 million ($0.9 million) due to delays from a supplier. Shares were unchanged. Oxford agreed to acquire Andor Technology on December 10 (see IBO 12/15/13). Shares climbed 9.6% the next day. On December 19, Analytik Jena reported a fiscal 2013 EPS loss of €0.56 ($0.75), compared to a profit of €0.59 ($0.74). Shares traded slightly lower. On the same day, SDI announced an EPS loss of 0.33 pence ($0.01) for the fiscal 2014 half year ending October 31, compared to just above breakeven a year ago. Shares fell 20% on December 20.