The stock market is up big in 2019. The global economy has shown signs of stabilizing and improving. Trade and FX (foreign exchange) headwinds have become less severe. Corporate earnings have continued to be largely better than expected. All in all, things are simply getting better, economically speaking, and that has paved the path for a global financial market rally.
Leading the 2019 stock market rally have been growth stocks. In short, as confidence has returned to financial markets, it has returned doubly so to growth stocks. There is nothing unusual about this. When times are good, growth stocks outperform, since there is clarity with respect to their growth outlooks. When times are bad, growth stocks under-perform, since there is a lack of clarity on the growth front.
But, the peculiar thing about the 2019 stock market rally is that there has been an unusually large number of breakout stocks in the growth category which have staged jaw-dropping year-to-date rallies. Usually, you get a handful of breakout stocks that double in three months. This year, there are dozens of stocks that have risen 60%, 80% and even 100%-plus over the past three months.
Not all of these breakout stocks will continue to be shining stars. But some will, and it’s important to know the difference as volatility creeps back into financial markets over the next several months (thanks, inverted yield curve).
With that in mind, let’s take a look a seven breakout stocks of 2019 which deserve your attention.
Breakout Stocks of 2019: Wayfair (W)
YTD Gain: 64%
How It Got Here: Furniture e-retailer Wayfair (NYSE:W) has been in rally mode for all of 2019, mostly because the company has continued to report robust numbers which underscore the stock’s long term bull thesis. Specifically, every important metric continues to trend up with great pace (active customers, revenue per active customer, customer retention, new customer order rate, international revenue growth, so on and so forth), and this gives credibility to the thesis that Wayfair continues to emerge as the leader in the rapidly growing online furniture market.
Where It’s Going Next: Wayfair stock may run into some turbulence here. The stock is a long-term winner, mostly because management continues to make all the right moves to grow the company’s market share and leadership position in the secular growth online furniture market, which has plenty of room to grow given still-low online furniture penetration rates. Margins have a long runway for improvement, too. But the stock has come very far, very fast, and is now trading at valuation levels which are too perfect for a company that has plenty of exposure to a slowing housing market.
YTD Gain: 66%
How It Got Here: Everyone loves a good turnaround story, and fast casual Mexican eatery Chipotle (NYSE:CMG) is giving investors just that. New management came in about a year ago. Ever since, the company has executed flawlessly, refreshing the menu with unique offerings, expanding the digital business and re-branding through innovative marketing campaigns. The numbers have improved dramatically as a result, and CMG stock has rallied in a big way.
Where It’s Going Next: At the current moment, CMG stock is just about the most expensive restaurant stock I have ever seen. To be sure, some of this valuation premium is warranted — comparable sales growth trends look good, the unit growth runway is big and margins have room for improvement.
But, the U.S. economy is slowing, and there’s also adverse health food trends at play here — the rising popularity of acai bowls, sushi, poke and superfood — which should limit comps’ upside in the near future. As such, today’s perfect valuation isn’t sustainable for CMG stock.
YTD Gain: 130%
How It Got Here: Streaming device giant Roku (NASDAQ:ROKU) used to be one of the market’s favorite growth stories, thanks to its broad exposure to the secular growth of the SVOD (streaming video on demand) market. But the market forgot about that long-term growth narrative in late 2018 amid slowing economy and rising competition concerns. Roku put those concerns to rest in early 2019 with strong holiday quarter numbers. The market remembered that this is a secular growth company, and Roku stock has consequently rallied in a big way ever since.
Where It’s Going Next: Roku stock is likely only heading higher from here. The long term growth narrative is only becoming more and more compelling, as the company continues to extend its dominance as the go-to SVOD service aggregator and access point. Even competitors are starting to use Roku to grow their own streaming services. Meanwhile, the stock successfully tested and held the critical $60 level, and is now bouncing strongly off it. As such, the fundamentals and technicals remain favorable here, meaning Roku stock should stay on an uptrend.
YTD Gain: 82%
How It Got Here: Shares of database company MongoDB (NASDAQ:MDB) have been on a tear in 2019 thanks to a monster fourth quarter earnings report which underscored that this company is successfully gaining share in the exceptionally large database market using a unique approach. Specifically, MongoDB provides database services which morph together relational architectures with non-relational architectures (read more about it here). This unique approach to databases is gaining popularity as the volume of non-relational data grows, and MongoDB’s customers and revenues are consequently growing very quickly. As that has happened, MDB stock has rallied.
Where It’s Going Next: MDB stock has come very far, very fast, and is very expensive, even relative to other high-growth SaaS stocks. Thus, near-term turbulence is warranted. But this is nothing to worry about. Long term, MDB stock will only head higher.
This is a $370 million revenue company rapidly gaining share in a $60 billion database market, meaning the runway for growth is long. So long as MongoDB continues to execute on that runway (as they have over the past several years), this stock will only go higher from here in the long run.
The Trade Desk (TTD)
YTD Gain: 72%
How It Got Here: In case you haven’t heard, programmatic advertising — using machines to buy and sell ads — is the future, and The Trade Desk (NASDAQ:TTD) is the company at the heart of the programmatic advertising revolution. Broadly speaking, the automation wave is starting to hit the advertising world, and companies are increasingly relying on machines and algorithms (not humans) to optimize ad spend allocation. This pivot towards machines means a pivot towards The Trade Desk’s platform, which is home to the best programmatic advertising solutions on the market. Recent numbers underscore that this pivot is happening with increasing scale, and TTD stock has consequently turned into a big winner.
Where It’s Going Next: TTD stock is one of my favorite long-term growth stocks. Gross ad spend on the platform was under $2.5 billion last year. The global advertising industry is marching towards $1 trillion. Eventually, most of that $1 trillion in ad spend will be transacted problematically, mostly because automation provides unparalleled efficiency advantages. Thus, TTD is tapping into a tiny portion of its addressable market at scale. So long as The Trade Desk maintains its current leadership position in the programmatic advertising market, this company will continue to grow at a very rapid rate, and that will help keep TTD stock on a long term uptrend.
YTD Gain: 99%
How It Got Here: Left-for-dead social media company Snap (NYSE:SNAP) has staged an impressive turnaround in 2019 mostly as a result of one thing: user base stabilization. From 2017 into the end of 2018, Snap’s user base went from steady growth, to back-to-back quarters of user base shrinkage. Everyone freaked out, and SNAP stock was killed. Then, in early 2019, Snap’s user base returned to growth. That improved investor sentiment, and put bulls back in control. SNAP stock has consequently almost doubled in 2019.
Where It’s Going Next: User growth is so big here because, if the user base continues to grow, advertisers will continue to flock to the platform, average revenue per user will rise, margins will expand, and net losses will turn into net profits. I think all of that will happen. But, not as quickly as the current price tag on SNAP stock implies.
The user base barely grew last quarter, Instagram is still eating Snap’s lunch, and margins are a long ways off from inflecting into positive territory. As such, slower-than-expected growth throughout 2019 will likely short-circuit this rally in SNAP stock.
YTD Gain: 78%
How It Got Here: The cannabis craze is alive and well. Just see Canadian cannabis company Cronos (NASDAQ:CRON). All pot stocks have staged big rallies in 2019 due to broad cannabis market fundamental improvements, including consistent and steady growth in the Canadian cannabis market as well as the legalization of hemp in the U.S. But, Cronos has been the out-sized 2019 winner thanks to the company’s relatively small market cap and a near $2 billion investment from tobacco giant Altria (NYSE:MO), which gives the company sufficient resources to go from small cannabis player to big cannabis player.
Where It’s Going Next: There is a long-term opportunity for Cronos to take the Altria investment, rapidly grow share in both the Canadian and global cannabis markets, and turn into a $10 billion-plus company one day. But, recent quarterly numbers challenge that thesis, as Cronos reported below-peer cannabis revenue and kilograms sold growth. That implies market share losses, not market share gains. So long as that remains true, it’s tough to see CRON stock tacking additional gains onto its already huge year-to-date rally.
As of this writing, Luke Lango was long ROKU, MDB, and TTD.