The stock market is partying in 2019 more than it has in over 20 years. We are coming into the end of June, and the S&P 500 is up more than 17% year-to-date. That’s the biggest year-to-date gain through June for the S&P 500 since 1997, when stocks were up 21% year-to-date in mid-June.
For what its worth, that first half 1997 rally in stocks continued into the back half of the year. Through the last six months of 1997, the S&P 500 rose another 8%, finishing the year with a record 30%-plus gain.
In other words, we are a little over halfway through 2019, and stocks are on track to have their best year in over 20 years. That’s pretty wild, considering in late 2018, financial markets globally were grappling with recession fears.
Nonetheless, now feels like an appropriate time to take a look at the stocks which are leading this record 2019 stock market rally. Which S&P 500 stocks have notched the biggest year-to-date gains through mid-June? As is always the case, it’s not who you would guess.
With that in mind, let’s take a look at the top seven performing S&P 500 stocks of 2019 thus far.
Best Performing S&P 500 Stocks of 2019: Coty (COTY)
YTD Gain: 105%
Beaten up global beauty giant Coty (NYSE:COTY) has staged a huge turnaround rally in 2019 — a rally big enough to make COTY stock the S&P 500’s best performing stock year-to-date through mid-June.
The recovery rally was kick-started in early February when the company reported a surprise double-beat quarter that caused shares to rally in a big way. A few days thereafter, German conglomerate Jab Holding Co offered to purchases 150 million shares of Coty at a purchase price of $11.65. That pushed COTY stock — which was trading below $10 at the time — even higher. Since then the company has reported another “good enough” earnings report, which has kept COTY stock in rally mode.
Can COTY stock stay in rally mode? Most signs point to yes. The global economic situation is starting to improve after a late 2018 slowdown.
Coty’s numbers and operational trends are also improving. Insiders are buying the stock. The valuation remains reasonable at 19 times forward earnings. Big turnaround plans are due to be announced on July 1. Broadly, there’s still a lot to like about COTY stock, and all those favorable conditions should keep this stock in rally mode.
YTD Gain: 78%
The second-best-performing S&P 500 stock of 2019 thus far is another dark horse turnaround company, Xerox (NYSE:XRX).
Document management systems company Xerox has been stuck in a multi-year decline. Now, management is finally doing something about it. They are reorganizing the company, looking to shed non-core assets, driving cost savings throughout the business, stabilizing top-line trends and putting the focus back on innovation. Most of these initiatives are working. The company has topped profit estimates in a big way in each of the past two quarters as margins are substantially improving. Investors have rallied around these profit improvements, and XRX stock is up nearly 80% year-to-date.
Will the rally continue? Not until revenue trends reverse course. The valuation is cheap at about 9-times forward earnings. But that low multiple has been the average valuation for this stock over the past several years. Margins are improving, so that warrants a higher valuation. However, revenue trends remain depressed, and depressed revenue trends do not warrant a higher valuation. Thus, until they reverse course, it’s tough to see XRX stock staying on a winning trajectory.
Chipotle Mexican Grill (CMG)
YTD Gain: 71%
Coming in third is Mexican fast casual eatery Chipotle Mexican Grill (NYSE:CMG).
The huge 70%-plus year-to-date gain in CMG stock can be attributed almost entirely to new management. The new team came to Chipotle in 2018 and implemented a series of growth initiatives ranging from expanding the digital delivery business to revamping the menu to rolling out new marketing strategies. All of those initiatives have come together to spark a healthy recovery in Chipotle’s traffic, sales, margin and profit trends.
The result? A huge bounce-back rally in what was a very beaten up CMG stock.
Can the stock keep marching higher in the back half of 2019? I’m not convinced. I still think the macro-trends aren’t as good as they used to be for Chipotle. Namely, the health food craze has shifted from Mexican-style burritos and bowls in the mid-2010’s, to acai bowls, superfood cafes, poke, and various other non-burrito-related meals in the late 2010’s. Thus, I doubt unit performance levels and margins will return to peak levels, and the inability to do so will ultimately short-circuit this big rally in CMG stock.
Cadence Design Systems (CDNS)
YTD Gain: 65%
Slotting in at fourth, we have electronics design giant Cadence Design Systems (NASDAQ:CDNS) with a 65% year-to-date gain through June.
CDNS stock has rallied in a big way in 2019 as the secular bull thesis has gained traction, credence, and visibility through back-to-back double-beat-and-raise earnings report, both of which comprised low double-digit revenue growth and healthy margin expansion. Analysts raised price targets in response to both reports, and the stock has consequently been in rally mode all year long.
Will Cadence stock stay in rally mode for the rest of the year? I’m not convinced. Valuation is now an issue for this stock. At 32-times forward earnings, CDNS stock is trading at its biggest forward earnings multiple in several years. Throughout 2018, the stock traded at or below 25-times forward earnings. To be sure, growth is good (low double-digit revenue growth with steady margin expansion). But that good growth profile seems fully priced in here and now. As such, further upside seems limited by an already stretched valuation.
Advanced Micro Devices (AMD)
YTD Gain: 65%
Last year, chip company Advanced Micro Devices (NASDAQ:AMD) was the best-performing S&P 500 stock. AMD is following up that record 2018 performance with another strong year in 2019.
With a 65% year-to-date gain, AMD stock is the fifth-best-performing S&P 500 stock in 2019 thus far. The driver of the out-performance? The same thing that drove out-performance in 2018: relentless market share expansion.
The global central processing unit (CPU) and graphics processing unit (GPU) markets are huge — big enough to support a $210 billion market cap for Intel (NASDAQ:INTC) on the CPU side, and a $100 billion market cap for Nvidia (NASDAQ:NVDA) on the GPU side. AMD is a small player in this market, with a market cap just under $32 billion. But through faster-than-peer product innovation, it is rapidly winning share from Intel and Nvidia, and in so doing, becoming an increasingly large and important CPU and GPU company.
Will AMD stock stay in rally mode? In the long term, yes. The present outlook is for AMD to continue to steal market share from Nvidia and Intel over the next several years. That share expansion, in a market supported by healthy growth drivers, should drive robust revenue and profit growth at AMD, the sum of which should drive AMD stock higher. But, in the near term, valuation friction is a problem for AMD stock, and prices well above $30 don’t seem justified just yet.
YTD Gain: 62%
The sixth-best-performing S&P 500 stock of 2019 is investment analysis solutions provider MSCI (NYSE:MSCI), with a 62% year-to-date gain.
The big rally in MSCI stock in 2019 can be attributed to the company’s continued success in its transformation to a high-margin, recurring revenue subscription business. MSCI has reported back-to-back strong earnings reports in 2019, both of which underscore that the subscription business is growing nicely and that margins have potential to move higher in medium-to-long-term. Investors have celebrated those results and pushed MSCI stock materially higher over the past six months.
Is MSCI stock due for another big run in the back half of 2019? Unlikely. This is a good growth company that is benefiting from big data and analytics tailwinds. But, the growth trajectory isn’t that robust. Organic revenues rose less than 10% last quarter, while subscription revenues rose just 10%. Margins have potential to move higher, but they are already pretty high, and further upside is fairly limited. As such, you are probably looking at a mid-teens profit grower here. MSCI stock trades at 33 times forward earnings. That’s a big multiple for mid-teens profit growth — almost too big — meaning valuation friction will prevent MSCI stock from heading much higher in the near term.
Anadarko Petroleum Corp (APC)
YTD Gain: 61%
Last, but not least, on this list of the S&P 500’s best performing stocks of 2019 thus far is Anadarko Petroleum Corp (NYSE:APC), with a 61% year-to-date gain.
The driver behind APC stock’s big 2019 gain? A bidding war between Chevron (NYSE:CVX) and Occidental Petroleum (NYSE:OXY). Chevron came in and offered to buy Anadarko for $65 per share. Given the huge premium and obvious synergies, it seemed like a done deal. Then news broke that prior to that buyout offer being announced, Anadarko and Occidental had been in mergers and acquisitions talks, with the price tag in those talks hovering in the $70’s. Shortly after those reports, Occidental pulled the trigger on a cash-and-stock deal for Anadarko which, at the time, valued APC at $76 per share. Net net, a bidding war between Occidental and Chevron drove APC stock up more than 60% this year.
Will APC stock stay in rally mode? Probably not. The latest update is that Anadarko management views the Occidental offer as superior to the Chevron offer, and that Chevron won’t boost its offer. The Occidental offer, which is a cash and stock offer, pegs the takeover value of APC stock at about $70. That’s where APC stock trades today. Thus, further acquisition-driven upside in APC stock seems muted.
As of this writing, Luke Lango was long INTC and NVDA.