In January, I published a gallery that included seven dark horse stocks that had the potential to explode higher in 2019. The premise was simple. Because risk and reward are tied together in financial markets, it’s usually the high risk, dark horse stocks that end up being the biggest winners in any given year. Case in point: all of 2018’s big winners, including unknown or given-up-on names like Tandem Diabetes Care (NASDAQ:TNDM), Turtle Beach (NASDAQ:HEAR), Twilio (NASDAQ:TWLO), Glu Mobile (NASDAQ:GLUU), and Crocs (NASDAQ:CROX).
The seven dark horse stocks outlined in my January gallery have done broadly well thus far in 2019. Only one of them is down year-to-date. Three are up more than 40%, two are up more than 50%, and one is up as much as 70%.
Will these dark horse stocks continue to broadly outperform into the end of the year? The answer depends on the stock. For some of these dark horse stocks, the rally is just getting started. For others, the big 2019 rally appears to have already happened.
With that in mind, let’s take a look at how 2019’s dark horse stocks are doing thus far, and where they are going next.
Dark Horse Stocks for 2019: IBM (IBM)
YTD Gain: 19%
The Dark Horse Thesis: The dark horse thesis for IBM (NYSE:IBM) is pretty simple. You have a really beaten up blue-chip tech giant that is finding its groove again through reinvigorated cloud growth. As the company continues to find its groove throughout 2019 — mostly thanks to the Red Hat (NYSE:RHT) acquisition — growth rates will improve and IBM stock will bounce back.
Why It’s Up: IBM stock has rallied 20% in 2019 mostly due to multiple signs that the company’s AI and cloud businesses are gradually gaining ground, including a strong double-beat-and-raise earnings report in late January.
Where It’s Going Next: IBM’s AI and cloud businesses aren’t going to enter some renaissance. But they are improving, and those improvements will couple with Red Hat integration later this year make the numbers look pretty good. Those good numbers will continue to converge on a still discounted valuation, and keep IBM stock on a winning path.
Dark Horse Stocks for 2019: Spotify (SPOT)
YTD Gain: 29%
The Dark Horse Thesis: Too much hype caused Spotify (NYSE:SPOT) stock to plummet in 2018, and too little hype in 2019 should likewise cause the stock to soar. Investors seemingly forgot about the huge secular-growth narrative underlying Spotify stock, which includes the company turning into a global streaming music giant, and that near term memory loss won’t last forever. The market will soon remember, and when it does, SPOT stock will fly.
Why It’s Up: Spotify stock is up big in 2019 thanks to multiple positive developments, including strong quarterly numbers, successful expansion into India and talk of original podcast content.
Where It’s Going Next: Spotify stock will stay in rally mode for the rest of 2019 because the underlying narrative is dramatically improving. Specifically, the company now has a moat in the form of original content, growth isn’t slowing and international expansion is going much better than anyone expected. In other words, the growth narrative is firing on all cylinders. So long as this remains true, SPOT stock will head higher.
Dark Horse Stocks for 2019: Weibo (WB)
YTD Gain: 10%
The Dark Horse Thesis: Company-specific fundamentals at Weibo (NASDAQ:WB), including top- and bottom-line growth, have remained resilient and healthy amid a major China tech stock selloff. As such, all Weibo stock needs to explode higher is some positive developments on the U.S.-China trade war front. Weibo stock will get those developments in 2019, and as such, Weibo stock should rally in a big way.
Why It’s Up: Weibo stock is up slightly in 2019 thanks to positive developments on the U.S-China trade-war front, as well as strong numbers across the board from the China tech sector in early 2019.
Where It’s Going Next: Weibo stock is going higher. This stock remains way undervalued relative to its long-term growth potential and is one of the stickier, larger, and faster growing platforms in the China internet landscape. Revenue growth is big. Margins are big. User growth is big. Everything is big but the valuation. This disconnect can’t last forever. When it corrects, Weibo stock will soar.
Dark Horse Stocks for 2019: Skechers (SKX)
YTD Gain: 41%
The Dark Horse Thesis: The ugly duckling in the athletic apparel industry — Skechers (NYSE:SKX) — isn’t really an ugly duckling. Revenue growth has been very good and among the best in the industry. Margins have struggled, but they are turning around, and as they do turnaround in 2019, there will be no reason for SKX stock to trade at such a huge discount to its peers. Investors will rush in. SKX stock will pop.
Why It’s Up: SKX stock is up big in 2019 thanks to a strong double-beat earnings report wherein margins finally improved alongside healthy revenue growth, with the implication from management being that concurrent revenue and profit growth will be the new norm going forward.
Where It’s Going Next: SKX stock is heading higher. Revenue growth is healthy, and margins are finally starting to stabilize and even improve. As such, Skechers projects as a healthy profit growth company over the next several years, much like its peers. But at just 15 forward earnings, SKX stock still trades at a huge discount to peers, and this discount gives the stock ample fuel to keep rallying on strong earnings reports throughout 2019.
Dark Horse Stocks for 2019: Snap (SNAP)
YTD Gain: 72%
The Dark Horse Thesis: Domestic user-base stabilization at Snap (NYSE:SNAP) will couple with potential international growth through a revamped Android app in 2019 and change the whole narrative for SNAP stock. Advertisers will flock to the platform. Ad prices will go up. Revenue growth will ramp back up. Margins will expand with scale. And SNAP stock will retake the $10 level.
Why It’s Up: SNAP stock has surged higher in 2019 thanks to a strong earnings report that importantly highlighted an end to user-base erosion alongside continued robust revenue growth and margin expansion.
Where It’s Going Next: In my first dark horse article, I said SNAP stock could retake the $10 level in 2019. It has already done that, and it’s only March. As such, further gains in the near term seem unlikely. The stock appears maxed out here and now. There is more upside in the long run if the user base can return to growth, but until that happens, upside will be capped by what has now turned into a full valuation.
Dark Horse Stocks for 2019: Stitch Fix (SFIX)
YTD Gain: 52%
The Dark Horse Thesis: Weakness in Stitch Fix (NASDAQ:SFIX) stock in late 2018 was the product of temporary headwinds, all which will pass in 2019. As they do pass, this company’s long-term growth narrative of pioneering a new era of data-driven, curated, and subscription-based shopping will come back into focus. As it does, SFIX stock will rally back from a big late 2018 selloff.
Why It’s Up: There hasn’t been a specific catalyst behind the big move higher in SFIX stock in 2019 besides that the valuation had simply fallen too far. Also, broader retail sentiment and financial market confidence improved, both of which likely had a positive impact on SFIX stock in 2019.
Where It’s Going Next: In the long run, SFIX stock is heading higher. Why? Because this is a small company attacking a big market with an exceptionally unique approach. This unique approach offers consumers price and convenience advantages, and as such, will ultimately win share with time. Because Stitch Fix is so small relative to its big opportunity, this market share expansion narrative can last for a long, long time, meaning SFIX stock projects as a long term winner.
Dark Horse Stocks for 2019: Blue Apron (APRN)
YTD Gain: -7%
The Dark Horse Thesis: Thanks to a unique diet meal kit partnership with Weight Watchers (NYSE:WTW), Blue Apron (NASDAQ:APRN) has an opportunity stabilize the user base in 2019 at the same time that management is cutting costs. If so, revenue and margin trends will both improve this year, and as they do, exceptionally beaten up APRN stock could rise in a big way.
Why It’s Up/Down: Blue Apron stock rallied big in early 2019 on strong quarterly numbers, but has since given up all of those gains as investors have questioned the company’s ability to stabilize the user base.
Where It’s Going Next: Blue Apron is the only stock on this list that is down year-to-date, and there’s reason for that: it is the biggest wild card in the group, with the least going for it in the long haul. As such, it’s tough to say where APRN stock will go next. Having said that, if they can stabilize the user base in 2019 while still reducing expenses (which seems possible), then this stock could also turn into a huge winner.
As of this writing, Luke Lango was long SPOT, WB, SKX, SFIX, and WTW
