For the broader stock market, the first quarter of 2018 was one to forget.
The S&P 500 dropped a percent through the first three months of 2018. That is a pretty big deal. Quarterly drops for the S&P 500 don’t happen that often. The last time it did happen was just under 3 years ago.
Moreover, at the end of January, almost no one would’ve predicted that we would’ve ended the quarter in the red. At the end of January, the S&P 500 was up nearly 6%, its best month in nearly 2 years.
In total, what started with the best month in 2 years, ended as the worst quarter in 3 years.
Talk about volatility.
But some stocks shook off that broad market volatility and had really good first quarters. Here’s a list of 3 stocks up 50% or more in Q1.
Stocks up 50% in Q1: Stein Mart, Inc. (SMRT)
Stein Mart, Inc. (NASDAQ:SMRT) is an investment most people would hate. And with good reason.
Stein Mart is a struggling department store that is being eaten alive by Amazon.com, Inc. (NASDAQ:AMZN) and is having a tough time adapting to the digital retail takeover. Sales are in free fall. So are margins. There aren’t any profits, and cash flows are small and only getting smaller. Meanwhile, there is a ton of debt on the balance sheet which threatens the longevity of SMRT’s business.
That is why SMRT stock was at $0.50 in mid-February.
By the end of the quarter, though, SMRT stock shot up to a $1.50 — a 200% increase from its quarter lows.
The tripling in SMRT stock was the result of two things: 1) an infusion of capital from lenders, and 2) much better than expected fourth-quarter numbers. On the capital front, SMRT secured a new $50 million term loan which will provide the company with additional liquidity to support currently money-losing operations. On the earnings front, SMRT reported Q4 numbers that implied that this might not be a money-losing operation for long.
Comparable sales declines moderated in Q4. They are expected to inflect into positive territory next year, which would be a huge deal for this depressed retailer. Gross margin compression turned into expansion as the company is coming up against easy laps. Management expects that expansion to continue next year, again a big deal for this depressed retailer.
With comps and gross margin expansion turning into positive territory, SMRT might once again become a money-making operation.
At these prices, SMRT isn’t priced for that. That is why SMRT stock tripled in Q1. And this stock could explode much, much higher if comps and gross margins improve as they are expected to.
Stocks up 50% in Q1: Momo Inc (MOMO)
While other China internet stocks failed to make meaningful progress in Q1, Momo Inc (ADR) (NASDAQ:MOMO) is another stock up 50% in 2018.
Why the huge move higher despite weakness in other China internet stocks? A sharp change in sentiment.
For the longest time, MOMO stock was left in the dust as its peers rallied to all-time highs. Investors were concerned about MOMO’s core service — live video — being regulated harshly by the Chinese government. Because of this, investors didn’t give much merit to MOMO’s massive revenue and earnings growth rates. After all, those were short-term phenomena that were sure to be derailed by Chinese regulation in the near future.
But that hasn’t happened. Instead, MOMO has simply rattled off quarter after quarter of 50%-plus revenue growth and huge earnings growth.
Meanwhile, regulation concerns had plummeted MOMO stock to just 16-times trailing earnings late last year. Consequently, the more numbers supported a continuation of the MOMO growth narrative, the more the valuation on MOMO stock looked abnormally low. Investors bought the dip, the valuation normalized, and the stock headed higher.
This sharp turn in sentiment is why MOMO stock exploded 50% higher in the first quarter despite broad weakness across China internet names. Considering MOMO stock still trades at just 16-times forward earnings, there is undeniably a strong argument for this stock to have a great Q2, too.
Stocks up 50% in Q1: Netflix, Inc. (NFLX)
If you simply read headlines about the stock market recently, you would think that technology stocks were the reason for the market’s troubles in the first quarter. Between a data breach at Facebook, Inc. (NASDAQ:FB), production and credit issues at Tesla Inc (NASDAQ:TSLA) and regulation concerns at Amazon, big tech stocks did falter after a big January.
But one mega-cap tech stock that still had a massive first quarter? Streaming giant Netflix, Inc. (NASDAQ:NFLX). NFLX stock roared more than 50% higher in the first quarter of 2018.
That 50% rally is just more of the same for this company as it marches towards world domination in the internet television market. Indeed, this stock has come a long ways ever since the company fully pivoted into original content production in the summer of 2016. Back then, NFLX was a $90 stock. A year later, it had doubled to $180. Six months after that in early 2018, it rose another 80% to a high of $330.
NFLX stock has come crashing down recently. It’s 15% off recent highs. But even at those levels, it is still up 47% year-to-date and 90% over the past year.
In other words, the recent correction in NFLX stock just feels like a much needed breather after a torrid run higher which has lasted for several quarters. Investors should be aware of the #deleteNetflix movement that is erupting in Brazil, but they should also be aware that this movement is rather small in scale. Outside of that, there isn’t anything wrong with NFLX stock at these levels outside of valuation.
And when it comes to valuation, there is a strong argument for NFLX stock to head a lot higher in the long term. All together, then, NFLX stock could be a big winner in Q2.
As of this writing, Luke Lango was long MOMO, FB, and NFLX.