It appears that the worst is over for financial markets. Late 2018 was characterized by fears regarding a hawkish Federal Reserve, escalating trade tensions, and a slowing economy. Early 2019 has been characterized very differently. The formerly hawkish Fed has gone surprisingly dovish. Escalating trade tensions have cooled off. And the economy has slowed, but not by as much as feared.
As such, financial markets have been on a tear in 2019. Year-to-date, the S&P 500 is already up more than 8%, and it’s just early February. From the late 2018 lows, the S&P 500 is up an impressive 15% in less than two months.
This rally will continue. We are now more than halfway through earnings season. Although this earnings season has been choppier than previous earnings seasons, most companies are still beating estimates and the forward-looking down guides aren’t all that cataclysmic. As such, the fiscal 2019 earnings-per-share estimate still stands at $170 — even after several negative EPS guides — because while the economy is slowing, it’s not slowing by all that much.
Over the past 30 years, the market’s median price-to-earnings multiple on trailing twelve-month profits is just over 18. Combining an average 18X P/E multiple and $170 in 2019 EPS, it’s easy to see that a reasonable price target for the S&P 500 in 2019 is over 3,000. That implies over 10% upside into the end of the year.
As such, stocks should remain on an uptrend into the end of 2019. If so, growth stocks will re-emerge as the leaders of the bull market. Because these growth stocks were so beaten up in late 2018, their rebound in 2019 could be quite large.
With that in mind, let’s take a look at seven of the best growth stocks that will lead the market higher in 2019.
At the top of this list, of course, is the stock, which now holds the market cap crown, Amazon (NASDAQ:AMZN).
AMZN stock was beaten up in late 2018 due to concerns regarding rising rates (which would pressure the valuation) and slowing economic expansion (which would drag down sky-high growth rates). This combination of valuation and growth headwinds caused Amazon stock to plunge more than 30% off its highs in late 2018.
The stock has rebounded since. But, it’s still about 20% off all-time highs. Quite frankly, there’s no reason this stock shouldn’t be at all-time highs today. The e-commerce business continues to grow at a robust pace, and the offline business is rapidly expanding. The advertising and cloud businesses are soaring, and they bring with them sky-high margins which boost the overall profitability profile of the company. There’s multiple growth levers under the surface, including potential multi-billion dollar logistics, pharmaceutical and cloud gaming businesses.
Overall, everything is still going right for this company. The stock is just 20% off its highs due to macroeconomic concerns. Those macroeconomic concerns are fading. As they continue to do so, AMZN stock will push toward all-time highs.
Cloud stocks were among the market’s favorites in early 2018. But, when panic hit the market in late 2018, cloud stocks went from must buys to must sells. Cloud giant Salesforce (NASDAQ:CRM) was no exception.
CRM stock dropped about 25% off its all-time highs in late 2018 as macroeconomic concerns weighed on the company’s growth prospects and on the stock’s valuation. But, as those concerns have moved into the rear-view mirror in 2019, CRM stock has come roaring back. It now trades just a few points off of all-time highs.
This rally will continue. Salesforce is at the heart of the cloud and data revolutions. The company leverages data and analytics to deliver robust cloud solutions to enterprises that want data-driven insights. Demand for these services is only going to explode higher over the next several years as data-driven and cloud become the global enterprise norm.
As this happens, Salesforce’s numbers will get better, and CRM stock will head higher, especially so against a broadly favorable backdrop for equities (as is the case in 2019).
The long-awaited Facebook (NASDAQ:FB) turnaround has finally arrived, and it will persist throughout 2019.
Calendar 2018 was arguably Facebook’s ugliest year ever. The company was hit by a plethora of political and social challenges amid mounting scrutiny regarding the company’s data privacy and protection policies. Those challenges coupled with economic challenges (revenue growth slowed, usage growth slowed, and margins compressed) and FB stock dropped 40% off its highs.
Calendar 2019 is off to a very different start. FB stock is up 30% year-to-date already, as a huge double-beat fourth-quarter earnings report eased slowing growth and compressing margin concerns. The takeaway is that Facebook didn’t suffer any lasting damage from 2018. The worst is over for Facebook, and 2019 will form a base year from which revenues and profits can continue to grow at a robust pace.
If this does prove to be the case, FB stock will continue to rally in 2019. The stock is still well off its all-time highs. There’s no reason the stock can’t get back to those all-time highs in 2019.
A big reason why financial markets tumbled in late 2018 was because China’s economy cooled to multi-year lows. That’s a big deal. Due to the rapid urbanization of its huge population base, China has been the biggest contributor to GDP growth over the past several years. Thus, as China slowed, the whole world slowed.
Also as China slowed, Chinese growth stocks tumbled. Chinese growth giant Alibaba (NYSE:BABA) was no exception. In late 2018, slowing growth and compressing margin concerns sparked a 40% selloff in BABA stock.
This selloff now appears to be over. In 2019, BABA stock is up more than 20%. That’s because there are signs that China’s economy is turning a corner from a slowing growth trend, Alibaba’s revenue growth remains robust above 50%, and margins are starting to stabilize.
Overall, BABA stock is back on a winning path. So long as China’s economy continues to stabilize and potentially even improve, BABA stock will remain on an uptrend throughout 2019.
Streaming giant Netflix (NASDAQ:NFLX) had a crazy 2018.
NFLX stock entered 2018 under $200. Two huge subscriber growth quarters later, the stock more than doubled to above $400 by July. Then, a subscriber miss stung the stock, while broad macroeconomic headwinds only made things worse. By Christmas Eve, NFLX stock dropped well below $250.
Ever since then, NFLX stock has been on a tear. The stock now trades at $350. A $400 price tag is likely by the end of 2019. Why? Because the Netflix growth narrative is only gaining momentum. The cord-cutting trend is going global, and consumers are increasingly turning toward the streaming space for entertainment services. As they do, Netflix continues to be the brightest star due to its relatively low price point and robust portfolio of original content.
So long as this remains true, Netflix has runway to 300 million-plus global subscribers. That runway offers enough potential upside to keep NFLX stock on a winning path in 2019.
Despite the broad 2019 rebound in stocks, the S&P 500 remains more than 7% off its all-time highs, while many big growth stocks are still 10% or even 20% off their all-time highs.
That isn’t the case with Shopify (NYSE:SHOP) stock. Shares of the e-commerce solutions provider are at all-time highs, and this speaks to just how strong the underlying growth narrative is here. Shopify is empowering a new generation of digital sellers by providing e-commerce tools to anyone and everyone with a product to sell. As such, the company is democratizing the e-commerce process, and in so doing, is expanding digital commerce trust and unlocking significant value. See other companies that have done the same in other industries, like Uber and Airbnb. Expansion of trust consistently leads to the expansion of opportunity and value.
Amid broad macroeconomic concerns in late 2018, Shopify’s growth narrative didn’t slow down at all. Third-quarter numbers were very robust. Fourth-quarter numbers likely will be too. As will 2019 numbers.
Overall, the Shopify growth narrative remains as healthy as ever. SHOP stock is at all-time highs, a reflection of this underlying strength. While valuation is slightly stretched, Shopify stock is the sort of stock you want to buy and hold for a very long time.
Alongside Facebook, technology giant Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) struggled in 2019 as the ethics and mechanics behind its digital advertising business were called into question. GOOG stock dropped nearly 25% in late 2018.
It has been up, up and away ever since Christmas Eve. The core growth narrative here remains robust, thanks to continued strength in the digital advertising business. Margins are starting to improve again. The nascent but rapidly growing cloud- and AI-related businesses are scaling nicely, and have tons of firepower left.
In the big picture, Alphabet is at the core of almost everything consumers do on the internet. As such, this company has second-to-none staying power in the digital economy, and the digital economy continues to rapidly expand globally. This means Alphabet will likely remain a 15-20% revenue grower with stable margins over the next several years.
That growth profile is undervalued in a stock with a 20X forward multiple. As such, GOOG stock is reasonably undervalued here, against the backdrop of a rising market. That combination will lead to GOOG stock rallying in 2019.
As of this writing, Luke Lango was long AMZN, FB, NFLX, SHOP and GOOG.