After a nearly perfect 2017 that saw big gains happen alongside mitigated volatility, the stock market hasn’t been able to replicate that success in early 2018.
Year-to-date, the S&P 500 is essentially flat. More than that, at one point in late January, the S&P 500 was up nearly 8% on the year. By the beginning of February, it was down 1% on the year.
In other words, the stock market of 2018 has looked very little like the stock market of 2017. Big gains have been replaced with sideways trading. And volatility has once again reared its ugly head.
But the broad market’s struggles don’t apply to every stock.
Thus far in 2018, the stock market has had some pretty big winners. And by big, I mean big. The market’s best-performing stocks have staged huge rallies of 50% and up thus far in 2018.
With that in mind, here are a few of the stock market’s biggest winners so far in 2018.
Best-Performing Stocks #1: Netflix (NFLX)
Nothing seems to knock secular growth giant Netflix, Inc. (NASDAQ:NFLX) off its horse.
The other FANG names have struggled some in 2018. Facebook, Inc. (NASDAQ:FB) has been hit with data leak and personal privacy concerns. Alphabet Inc (NASDAQ:GOOG) is struggling to keep its margins up during a big investment period. Even Amazon.com, Inc. (NASDAQ:AMZN) has felt pressure recently due to regulatory threats.
But Netflix has faced zero meaningful threats so far in 2018. Meanwhile, the company continues to report strong beat-and-raise quarters that blow out expectations on every key metric from revenue to margins to earnings to subscribers.
That is why NFLX stock is up 70% year-to-date.
At this point, it seems that Netflix has reached escape velocity and is marching towards becoming the world’s biggest entertainment company. The Netflix streaming service just has such a powerful value prop (only $10-$15 per month for a seemingly unlimited library of exclusive content) relative to alternative entertainment options that global adoption at this point seem likes a question of when, not if.
That said, buyers should beware of valuation on Netflix stock at current levels.
I know that sounds silly for a stock that has done nothing but soar over the past several years, but even under bullish modeling assumptions of global domination and huge margin ramp, I still think the stock is only worth about $290.
Thus, at $320, it feels like the stock price has sprinted ahead of fundamentals in the near-term. In other words, if you want to buy this top-performing stock, it won’t hurt to wait for a meaningful pullback.
Best-Performing Stocks #2: Fossil Group Inc (FOSL)
Not many people would guess this, but struggling traditional watch giant Fossil Group Inc (NASDAQ:FOSL) has actually outperformed streaming TV giant Netflix so far in 2018.
And its not because Netflix has struggled. Netflix stock is up 70% year-to-date. Fossil stock? It’s up 90%.
What is happening under the hood? Fossil is morphing into one of Wall Street’s most powerful turnaround stories.
For several quarters, Fossil fell victim to the smartwatch trend which destroyed the traditional watch market. Fossil’s core watch business tumbled. Sales got sliced. Margins were crushed. Net profits turned into net losses. And Fossil stock dropped from $130 to $5.
Yes, that is right. Fossil stock went from $130 to $5.
Seem overdone? It was.
Fossil wasn’t just laying idle as the smartwatch market killed its traditional watch business. They invested big into developing hybrid smartwatches, which are essentially the result of traditional watch fashion converging with smartwatch technology. Last quarter, FOSL gave the market signs that these hybrid smartwatches are starting to gain serious traction.
This momentum should persist.
Apple Watch won’t entirely dominate the smartwatch market. Instead, there will be multiple players in the smartwatch market, and one of the bigger players will be the company that most successfully integrates traditional watch fashion with smartwatch technology. Right now, Fossil is doing that best. Considering Fossil is the traditional watch giant, it is also pretty likely that Fossil continues to be the best at this for several years to come.
Meanwhile, Fossil stock is still at just $19. Again, this used to be a $130 stock. Therefore, it is pretty easy to conclude that if the smartwatch business continues to scale, Fossil stock still has a lot of room to run higher.
Best-Performing Stocks #3: Chipotle Mexican Grill, Inc. (CMG)
The comeback in Chipotle Mexican Grill, Inc. (NYSE:CMG) has finally arrived. After the company hired a new CEO (who they stole from Taco Bell) and reported pretty good first quarter numbers, CMG stock has taken off and not looked back.
Year-to-date, CMG stock is up nearly 50%. And that includes a big drop in mid-February on bad Q4 numbers. Since then, CMG stock is up nearly 70%.
I was a vocal bear turned vocal bull on CMG stock. I hated the stock on the way down because it felt like health food trends had moved on from CMG and towards poke and superfood bowls. But then the tide started turning. Chipotle stores started filling up again, and the new CEO gave me faith that a Taco Bell-like turnaround was coming to Chipotle (that means targeted advertising, store redesigns, and menu innovations).
That said, after this blistering 70% rally off its 2018 low, CMG stock looks maxed out. The company faces a lot of competition in the quick casual restaurant space. Poke and superfood bowls are still very popular. Meanwhile, McDonald’s Corporation (NYSE:MCD) is actually reinventing themselves to be somewhat healthy with fresh beef patties and “Better Chicken” offerings (maybe not entirely healthy, but at least healthier than before).
Plus, margins will remain under pressure into the foreseeable future thanks to wage hikes.
Overall, then, if you put the current turnaround euphoria in context with the broader picture of a rebounding food chain in an only increasingly competitive QSR space, it is easy to see that CMG stock may have sprinted ahead of fundamentals in the near-term. Indeed, by my numbers, any price tag over $400 seems a little overdone here and now.
As such, while Chipotle has been one of the best-performing stocks so far in 2018, I expect gains from here through the rest of the year to be largely muted.
As of this writing, Luke Lango was long FB, GOOG, AMZN, and FOSL.