After this December, it might seem like the world is ending. And yes, the markets are volatile right now. After Christmas Eve’s collapse, we may be in for the worst December on record. As of this writing, the market is attempting to recover, but it remains to be seen how fair down the S&P 500 will finish 2019. But it isn’t all bad.
Certain sectors — small caps in general, semiconductors, cyclicals — have been hammered. But there have been plenty of winners, too. Of stocks with a market cap over $300 million, just under one-fourth have gained so far this year. Some of the companies simply have had excellent years — or are the types of stocks that can succeed in any market environment.
But a few of the 2018 stocks to buy seem simply to have escaped the sell-off of the past few months — but seem likely to underperform in 2019. Most of these 12 stocks have gained nicely (by at least 8%) in a rough year for the market as a whole. Yet there are reasons to believe that the good news, and the strong performance, may come to an end as the calendar turns.
Stocks to Sell in 2019: Twilio (TWLO)
A year ago, I called out Twilio (NYSE:TWLO) as a 2017 loser that would be one of the best stocks to buy for 2018. (I also picked IBM (NYSE:IBM), though, so my proverbial crystal ball wasn’t completely clear.) Since then, TWLO stock has soared, gaining over 200%.
There are reasons for the gains. Twilio earnings reports have been sensational: the ‘worst’ quarter of the year was Q2, when the company beat consensus expectations for revenue growth by some 15 points. The cloud-based story that sent TWLO stock soaring after its 2017 IPO has re-emerged fully intact (and maybe improved). Twilio long has been considered a takeover target. There’s still a ‘wall of worry’ argument, as well, with a number of observers highlighting questionable valuation as TWLO touched $100 (including on this site).
That said, TWLO stock looks like a dicey play heading into the New Year. Cloud optimism notwithstanding, this is not a market thrilled about paying 11x 2019 revenue for anything. The fears that drove the stock down last year — notably its loss of key client Uber — may return. Competition will remain intense, and there’s the long-term risk that (like Uber) the best clients will take their projects in-house at some point, leaving Twilio to fight for the remainder.
I don’t necessarily expect that TWLO stock will have a 2019 as ugly as 2018 was beautiful. But there’s clearly room for a pullback in the New Year looking at both the valuation and a recently weakening chart.
Stocks to Sell in 2019: Boston Beer (SAM)
The strength in Boston Beer (NYSE:SAM) in 2018 looks rather surprising. The beer space on the whole has had a terrible year. Anheuser-Busch InBev (NYSE:BUD) is down a stunning 38% and halved its dividend to manage its debt load. Corona owner Constellation Brands (NYSE:STZ,STZ.B) is off 23% and at an 18-month low. So is Craft Brew Alliance (NASDAQ:BREW), whose shares have dropped 18% this year.
Yet SAM stock has performed admirably. It’s still up more than 25% after the recent market plunge. The fact that the company is diversifying away from beer into hard tea and sparkling water helps. But even after a year-end pullback, SAM still trades at 31x forward EPS despite still-middling growth.
That seems a tough multiple to support — particularly if there’s any sign of disappointment in Q4 results or 2019 guidance. Meanwhile, SAM is testing support for the third time in a clearly nervous market. If that support breaks, SAM’s 2019 certainly will be much more disappointing than its 2018.
Stocks to Sell in 2019: Advance Auto Parts (AAP), AutoZone (AZO), and O’Reilly Automotive (ORLY)
It was only about eighteen months ago when investors were dumping auto parts retailers Advance Auto Parts (NYSE:AAP), AutoZone (NYSE:AZO), and O’Reilly Automotive (NASDAQ:ORLY). Ugly earnings reports, notably the fiscal Q3 release from AZO in May 2017, spooked the market. Amazon.com (NASDAQ:AMZN) was on the way to undercut everyone on pricing, and the retail sector as a whole was plunging.
AZO and ORLY would bottom in July, however. And AAP followed in November. And all three stocks have had torrid years so far. AAP has gained 43%, ORLY 36%, and AZO 14%. In the entire S&P 500, those are the fifth, seventh, and 39th-best returns, respectively.
But it seems like the group is due for those fears to return. Investorplace’s Josh Enomoto argued after AutoZone earnings earlier this month that it was time to sell AZO stock. The case he makes applies to all three retailers. The threat from Amazon and Walmart (NYSE:WMT) hasn’t gone away. Self-driving and electric vehicles could eat into demand. Cars last longer — but they’re also more reliable. And the ability to “work on your car” is both foreign to younger demographics and increasingly difficult as the amount of electronic content in engines increases.
In fact, the bear case for the group might not have been wrong — it just might have been early. And that case might look a lot stronger in 2019.
Stocks to Sell in 2019: Tesla (TSLA)
In the course of a tumultuous year, TSLA has fought off the bears. Despite controversies including an SEC settlement after a buyout was announced in a Tweet and an unfounded allegation of pedophilia against a Thai cave diver, Elon Musk had a positive YTD gain until just last week.
A blowout Q3 left TSLA bulls feeling confident — but I still see a rocky road ahead. The “will they or won’t they?” question surrounding a potential capital raise still hasn’t been answered. Tesla has to shift from satisfying built-up demand for the Model 3 to growing its market. Potential growth catalysts like the China factory, the semi, and the Model Y have to play out.
Despite all this, TSLA had been outperforming, but the last few sessions have shown us that Tesla is going to have to be something close to bulletproof to keep riding higher in 2019.
Stocks to Sell in 2019: Starbucks (SBUX)
This after all is a stock trading at nearly 25x 2019 EPS estimates — and yet the news isn’t that good. The company pulled down long-term EPS growth targets at its Investor Day this month — for the second time in little more than a year. The U.S. market is saturated. Same-store sales have decelerated — and traffic has turned negative.
And Starbucks’ growth going forward depends largely on an ambitious expansion into China. That seems a real risk given market worries about that market. At the very least, there are better — and cheaper — plays on China growth than SBUX stock at a nearly 25x P/E.
Stocks to Sell in 2019: Under Armour (UAA)
Under Armour (NYSE:UA,UAA) too gave disappointing guidance at its Investor Day. But unlike SBUX, UAA stock fell hard on the news. UAA stock has pulled back over 30% in just a few sessions after reaching its highest levels in almost two years.
But the pullback doesn’t look like a buying opportunity — but rather a harbinger of a potentially difficult 2019. The long-term guidance given last week only confirmed my argument that Under Armour is priced somewhere close to perfection. Even assuming the company gets operating margins close to the levels of rivals Nike (NYSE:NKE) and adidas (OTCMKTS:ADDYY), revenue growth has to accelerate markedly.
Even around $18, investors seem to be asking a lot — and likely too much. Investors seem to have to come to that realization over the past few sessions — and I question what Under Armour really can do in 2019 to change that.
Stocks to Sell in 2019: New Age Beverages (NBEV)
New Age Beverages (NASDAQ:NBEV) has nearly tripled this year on the back of optimism toward its CBD-infused beverages. But it’s been a volatile ride. The stock skied from under $2 to over $9 in September; neared $3 last month; and doubled in the last five weeks before falling to $5 with the rest of the market.
In other words, NBEV looks an awful lot like a bubble stock. The acquisition of Morinda earlier this month has driven optimism, but the company paid 4x EBITDA (plus an unspecified performance earnout), and in stock no less. If the business (which actually is a multi-level marketing company) is that wonderful, why are its owners selling for such a cheap price? If NBEV is a buy at $5+, why did the company dilute shareholders at $3.50 just last month?
Meanwhile, rumors swirl of a potential takeout by Coca-Cola (NYSE:KO) or another large beverage company. But NBEV is a company whose past performance was dreadful: the stock traded literally for pennies as recently as early 2016. Why, exactly, this company is going to be bought by Coca-Cola — or dominate the CBD beverage space — isn’t clear. And if the big promises don’t come true, and the hype train moves on elsewhere in the CBD/cannabis space, NBEV could return to the lows very quickly.
Stocks to Sell in 2019: Chipotle Mexican Grill (CMG)
Count me as among the skeptics when it comes to the turnaround at Chipotle Mexican Grill (NYSE:CMG). Admittedly, I was skeptical earlier this year — and CMG has soared. The stock is still up 35% this year — and managed to climb 80% from February lows.
And Chipotle has made progress. Will Ashworth detailed that progress, and the bull case, on this site last month. At 37x forward earnings, though, and with cyclical fears still hanging over the market, I question just how much progress really is priced in. Same-store sales only have risen 3.3% so far this year. Low-hanging fruit on the margin front has been captured.
Investors are expecting a multi-year turnaround here to succeed. Maybe it will, but it’s not guaranteed. And with restaurant stocks holding up surprisingly well amid cyclical fears, there’s the risk that the sector alone brings CMG stock down with it.
Stocks to Sell in 2019: WD-40 (WDFC)
WD-40 Company (NYSE:WDFC) is a nice business to own. Its namesake product has a brand cachet that few industrial companies can match.
As a stock, though, WDFC seems to defy gravity. Again, it’s a nice business: management is guiding for sales growth of 4-7% in fiscal 2019 (ending August) and EPS of $4.51-$4.58. Earnings per share are expected to decline year-over-year, but due to an abnormally low tax rate this year which skewed the comparison. That aside, EPS is expected to grow 8-9% at the midpoint of the guided range.
For that growth, investors are paying a whopping 39x the high end of FY19 guidance. Like Rollins (NYSE:ROL) and a few other solid businesses, valuation simply seems detached from reality. And while WDFC did dip in October, it quickly recaptured those gains – and is threatening new highs.
The chart hardly seems like one to bet against (though 18% of the float is sold short at the moment). But at some point, valuation here simply has to give. Warren Buffett famously talked about buying a “wonderful business at a fair price”. The price here, however, hardly seems fair — or even close. At some point, WDFC seems likely to come back to Earth, and a more volatile market in 2019 might be the catalyst for it to do so.
Stocks to Sell in 2019: Shopify (SHOP)
I’ve gone back and forth on the bull case for Shopify (NYSE:SHOP) over the past year… and so has the market as a whole. SHOP stock is up 20% this year. But trading has been mostly rangebound since an April rally.
Shopify’s e-commerce platform does provide an intriguing growth story. The short case from Citron Research last year fell flat. But heading into 2019, there are real questions about valuation and long-term growth prospects.
SHOP stock, after all, still trades at about 15x trailing twelve-month revenue. That’s a huge multiple in any market — and particularly this one. Meanwhile, the company seems heavily reliant on small businesses, as I pointed out last month. That creates a significant risk to any further macro concerns — given that small businesses tend to struggle most when the economy turns.
The argument essentially is that Shopify stock is much more of a cyclical stock than investors realize. If that argument is right — and if investors come around to it — the multiple assigned to SHOP stock is going to compress quickly and sharply. And it will likely outpace the growth the Shopify business posts next year — and lead the stock to eventually break support around $120 and head south.
As of this writing, Vince Martin has a bearish out-of-the-money options position in Tesla. He has no positions in any other securities mentioned.