Stocks have been on fire in 2019. Year-to-date, the S&P 500 is up more than 16%. Over the past decade, the S&P 500 has rallied more than 16% in a full year only three times. It has done so only five times in the past two decades. We are already at that mark today, and it isn’t even July.
In other words, stocks have had a record-setting performance in the first half of 2019. As the old saying goes, “a rising tide lifts all boats.” Thus, as the broader market has rallied big in early 2019, most stocks have rallied alongside it.
But, as any good investor knows, no party lasts forever. There’s reason to believe this party in stocks will moderate into the end of the year. Depressed valuations supported the big rally in stocks in early 2019. Coming into the year, the S&P 500 was trading around 14-times forward earnings, well below the historical norm.
Today, this depressed valuation support no longer exists. The S&P 500 now trades at over 16.5-times forward earnings, which is above the historical norm for the index. Sustained profit growth can keep stocks in rally mode despite this above-average valuation. But, with valuations now higher than they were before, the big 2019 stock market rally will likely slow into the end of the year.
As it does slow, gains across the market will become less broad and more narrow, meaning that we will see a handful of stocks struggle in the back half of the year.
Which stocks fall into this category? Let’s take a look at six stocks to sell before the stock market party slows down.
Stocks to Sell for the Rest of 2019: Under Armour (UAA)
At the top of this list of stocks to sell, we have athletic apparel company Under Armour (NYSE:UAA).
The bull thesis on UAA stock is pretty simple. You have a beaten up athletic apparel company that has struggled to grow revenues over the past several years, and which operates at depressed margins. But the company has finally cleared its inventory, and management is sounding a bullish tone about growth prospects over the next several years. Thus, there’s reason to believe that revenue growth can and will re-accelerate over the next several years, and as it does, profit growth will be doubly robust since margins will ramp from a depressed 2018 base.
This bull thesis is legit. That is exactly what will happen. But, it misunderstands one very important thing: valuation.
UAA stock trades at 53-times forward earnings. The growth darlings in this industry, Nike (NYSE:NKE) and Lululemon (NASDAQ:LULU), both trade sub-40 forward multiples. They are also both growing revenues faster than Under Armour. Sure, UAA has more profit growth potential because of its depressed 2018 margin base. Even if you model everything out, though, it’s tough to justify a $29 price tag on UAA stock today.
As such, I think growth will disappoint in the back-half of the year, and that this disappointing growth will ultimately short-circuit the recent rally in UAA stock.
Second on this list of stocks to sell in the back half of 2019 is hyper-growth social media company Snap (NYSE:SNAP).
Much like Under Armour, the bull thesis on Snap is pretty simple. After several quarters of user base compression, the user base has finally stabilized, and will likely resume growth in the coming quarters as the Android app revamp grows the platform’s international reach. With the user base back in growth mode, the company can return its focus to improving the ad business, which should result in advertisers flocking back to the platform. This will result in healthy revenue growth, which should also drive strong margin expansion, and one day produce big profits at scale.
Much like the bull thesis on UAA stock, the bull thesis on SNAP stock misunderstands valuation and competition.
SNAP stock trades at a whopping 12-times forward sales. Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) both trade around 8-times forward sales. Again, some of the valuation premium is warranted because Snap is ramping growth from a smaller base. But competition concerns are very real here, and could ultimately short-circuit Snap’s renewed user growth trajectory and ad growth ramp, especially if Instagram plunges more into commerce and grows young consumers mind-share. If that happens, SNAP stock will fall in a big way from today’s elevated valuation levels.
Net net, SNAP stock has simply come too far and too fast in 2019, and looks subject to a big draw-down in the back half of year in the not-so-unlikely event that the growth trajectory flattens out.
Proctor & Gamble (PG)
Third on this list of stocks to sell in the second half of 2019 is consumer staples giant Proctor & Gamble (NYSE:PG).
At first glance, PG stock looks like a great place to hang out right now. This is a consumer staples giant which sells the sort of stuff that will have stable consumer demand forever regardless of the economic backdrop. Thus, with macroeconomic risks on the rise in a late stage bull market, P&G’s relatively stable profit growth outlook is attractive. Further, the stock has a juicy 2.7% yield, which looks especially attractive against the backdrop of a depressed 10-year Treasury Yield.
The problem, though, is that everyone is looking at PG stock this way, and long Procter & Gamble has become a crowded trade.
PG stock now trades at 24-times forward earnings. That’s a bigger forward earnings multiple than both Facebook and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). Both Facebook and Alphabet grew revenues by over 20% last quarter, have reported 20%-plus revenue growth for the past several years, and project to do the same over the next several years. P&G reported organic revenue growth of 5% last quarter and un-adjusted sales growth of 1%. Over the next several years, this projects as a low-single-digit revenue grower.
In other words, the long PG trade has become way overcrowded. Towards the back half of the year, as growth continues to come in at the low-single-digit range, this crowded trade will unwind, and PG stock will fall.
Another stock to sell in the back half of 2019 is retail coffee giant Starbucks (NASDAQ:SBUX).
Much like Procter & Gamble, SBUX stock looks really good upon first glance. You have the world’s leading retail coffee company which is using menu innovations and digital integrations to drive re-accelerated positive comparable sales growth in the U.S. At the same time, the company is rapidly expanding in China and has robust growth potential over there, supported by a long unit growth runway. Margins are stable. Profits should head higher. So should the stock.
But, there are competition risks here which could hamper the growth narrative in the second half of 2019.
On the U.S. front, traffic growth has gone from consistently positive to consistently negative, meaning that positive comps in the U.S. are being driven entirely by price hikes. But, with McDonald’s (NYSE:MCD) expanding its presence in the low-price breakfast category and indie coffee shops expanding their presence in the high-price breakfast category, Starbucks doesn’t have much wiggle room to hike prices further without risking big traffic declines. This all could come to a head in the back half of 2019, and comparable sales growth could fall back to the flat line.
At the same time, the China growth narrative is threatened by the rapid expansion of freshly public Luckin Coffee (NYSE:LK). In the big picture, the Starbucks growth narrative is sliding on thin ice right now. That ice could break in the back half of 2019. When it does, SBUX stock is liable to fall in a big way.
When it comes to stocks to sell in the back half of 2019, one name that comes to mind is cosmetics retailer Ulta (NASDAQ:ULTA).
Structurally, there is nothing wrong with the Ulta stock growth narrative. Ulta is the biggest cosmetics-focused retailer in the United States, and has naturally benefited from powerful secular growth tailwinds in the cosmetics industry over the past several years (the rise of selfie-focused and image-sharing apps has led to a rise in consumers wanting to look good, which has led to a rise in beauty sales). This tailwind will persist.
Ulta is also benefiting from a healthy unit growth narrative which has consistently powered 10%-plus unit growth over the past several years. This tailwind will largely persist, too. The company also has a strong direct business and healthy margins.
But, all of those tailwinds are slowing down and they will continue to slow. ULTA stock simply isn’t priced for this slowing to persist.
In 2017, comparable sales growth was nearly 16%. In 2018, it fell to 11%. Last quarter, it was 7%. For the full year, it’s expected at 6.5%. Digital sales growth and unit growth have followed a similar deceleration trajectory. Meanwhile, operating margins are flattening out.
The Ulta growth narrative is slowing. But, ULTA stock trades at a 52-week high valuation of nearly 28-times forward earnings. A 52-week-high valuation coupled with a slowing growth narrative? That’s not a recipe for success. As such, as those two divergent dynamics converge in the back half of 2019, ULTA stock could drop.
Last, but not least, on this list of stocks to sell for the rest of 2019 is IPO darling Zoom Video (NASDAQ:ZM).
Zoom is a great company. Video conferencing is the next big leg of growth in the enterprise communication world. Zoom is at the heart of this video conferencing growth narrative and has emerged as the hottest player in that market. Revenues rose more than 100% last quarter. Importantly, gross margins are in sky-high 80%-plus territory, the operating expense rate is rapidly falling, and the company is already profitable.
This rare combination of early profitability and big revenue growth has investors drooling over ZM stock. Consequently, the stock has nearly tripled from its IPO price.
But, this rally seems overdone. The video conferencing market is big. But not that big. Plus, there’s a ton of competition in this market, and Zoom is actually one of the smaller players. Sizable competition and a limited addressable market are two going concerns here. If you math out the company’s long term potential, it would take some awfully bullish assumptions to justify a $100-plus price tag for ZM stock today.
Broadly, then, ZM stock just seems to have come too far, too fast, during its IPO honeymoon phase. Eventually, this honeymoon phase will end, reality will sink in, and Zoom stock will drop.
As of this writing, Luke Lango was long NKE, LULU, FB, TWTR, GOOG, MCD, and LK.