It has been a record year for the stock market. In the first half of 2019, the S&P 500 rose 17%, marking the best first half performance for the index since 1997, when stocks were up more than 20% in the first half of the year. Following that 20%-plus rally in the first half of 1997, the S&P 500 proceeded to rise another near 10% in the back-half of the year, and closed the year up more than 30%.
In other words, not only are stocks off to their best year in over two decades, but the last time stocks were this hot to start a year, they stayed hot into the end of the year.
Will history repeat itself? Maybe. There are two big risks facing the markets right now: the U.S.-China trade war and slowing economic expansion. But, the trade war has been put on hold, and it looks increasingly likely that a deal between the two countries will get done soon. Meanwhile, the Federal Reserve is acting like they are going to cut rates, an action that should goose the economy and boost economic expansion.
Thus, the two biggest risks holding back stocks, may disappear over the next few months. If they do, stocks will have a big summer. With that in mind, let’s take a look at ten stocks to buy for a potential summer rally.
The Catalyst: U.S.-China trade deal
The Thesis: Shares of Chinese e-commerce giant Alibaba (NYSE:BABA) have been under pressure over the past few months as trade tensions between the U.S. and China have escalated. But, those trade tensions are now de-escalating once again, as both countries have agreed to resume trade negotiations and put a truce on the trade war.
It appears increasingly likely that a trade deal will get done soon. As investors grow more optimistic regarding the prospects of a trade deal in the foreseeable future, Chinese stocks will head higher since such a trade deal will provide a material boost to the Chinese economy. The biggest and most high profile of those Chinese stocks? Alibaba.
Consequently, as trade tensions cool in the summer and China’s economy picks up steam, BABA stock should bounce back toward the $200 level.
The Catalyst: Revenue growth re-accelerating
The Thesis: Shares of global social media giant Facebook (NASDAQ:FB) were under pressure in 2018 due to data privacy and regulation concerns. But, such concerns have faded into the background in 2019, and the stock has rallied big year-to-date.
This big rebound rally in FB stock should continue into the summer as the company’s revenue growth trajectory ramps back up for several reasons. First, a trade deal should help Facebook’s business, since it means companies won’t have to worry about cutting costs from supply chain disruptions, and will have more budget to allocate toward advertising. Second, a potential rate cut should goose the economy, and increase corporate spending on things like advertising. Third, the pivot into commerce should provide a new revenue tailwind.
Net net, Facebook’s growth narrative is set to improve substantially over the next few months, and as it does, investors will continue to buy into the FB rebound narrative.
The Catalyst: Strong earnings
The Thesis: Over the past several years, sandal footwear brand Crocs (NASDAQ:CROX) has orchestrated one of the most impressive retail turnarounds anyone has ever seen, simply by narrowing the product portfolio and focusing on the company’s classic foam clog (which has reinvigorated revenue growth and cut expenses from the operating model). This turnaround has propelled CROX stock from $6 in mid-2017, to over $30 by early 2019.
Over the past few months, that big turnaround has hit a snag as the whole CROX growth trajectory slowed against the backdrop of broader retail turmoil in early 2019. But, that dour retail backdrop has significantly improved since then, as U.S. labor markets have remained healthy, rates have plunged and trade tensions have eased. Plus, consumer interest with respect to Crocs has only surged higher since then, and the company just scored a big partnership with Vera Bradley.
Overall, then, the numbers over at Crocs should be a lot better this summer, than they were in early 2019, and that sequential improvement should drive a big rebound rally in CROX stock.
The Catalyst: Improving semiconductor market conditions
The Thesis: Shares of GPU giant Nvidia (NASDAQ:NVDA) have struggled over the past year as slowing demand across the global semiconductor market has converged on huge inventory levels to create a material drag on semiconductor revenues and margins. Nvidia has been no exception. Revenues and margins have dropped over the past year, and as they have, NVDA stock has dropped, too.
But, the fundamentals underlying the semiconductor market are starting to improve. Demand remains weak, but should improve as trade tensions between the U.S. and China cool, and as the Fed cuts rates. Meanwhile, supply remains high, but a rebound in demand should help alleviate the inventory glut. At the same time, bitcoin prices have come roaring back, and that brings bitcoin mining revenue back into the picture. Cloud gaming catalysts in the back half of 2019 should similarly provide a boost to Nvidia GPU demand.
All in all, the fundamental backdrop supporting NVDA stock should substantially improve in the summer of 2019, and into the end of the year. Those improvements should drive up investor demand for Nvidia stock, and ultimately push the stock higher over the next few months.
The Catalyst: A stabilizing global economy
The Thesis: Economically sensitive industrial giant 3M (NYSE:MMM) has suffered from a slowing growth and compressing margin trend over the past several quarters as the global economy has similarly slowed. This slowdown has led to a wipe-out in 3M stock, which is presently more than 30% off its 52-week highs.
But, the global economy is starting to show signs of stabilization, and could start to improve in the back-half of the year as U.S.-China trade tensions cool and as the Fed cuts rates. This global economic improvement should lead to a boost in consumer and business confidence, which should lead to a boost in consumer and business spending. Ultimately, some of that spending will find its way onto 3M’s income statement, and this company’s numbers in the back-half of the year could be much better than the numbers early in the year.
This fundamental improvement will converge on a stock that is trading at a discount to its average valuation and is more than 30% off 52-week highs. In other words, fundamental strength will converge on stock price weakness in the back half of 2019. That convergence should produce a nice bounce-back rally in 3M stock.
Foot Locker (FL)
The Catalyst: Strong earnings
The Thesis: Once struggling athletic footwear retailer Foot Locker (NYSE:FL) has staged a nice comeback over the past few years, as the athletic apparel sector has stabilized in its shift from wholesale retail to direct retail. As it has, Foot Locker’s numbers have improved. Last quarter, this company reported both positive comparable sales growth and margin expansion.
Yet, FL stock presently trades 35% off its 52-week highs, and at a measly 8X forward earnings. Why? The trade war. Foot Locker finds itself at the epicenter of the U.S.-China trade war. The athletic footwear industry outsources a lot of production. The biggest destination of that outsourcing is China. As such, higher tariffs on Chinese imports stand to significantly and adversely impact Foot Locker’s numbers. Investors have been persistently nervous about this, and FL stock has remained very weak.
But, the U.S. and China agreed to a trade war truce recently, and it looks likely that a trade deal is coming soon. At the same time, the Fed will likely cut rates soon, and that will provide a boost to consumer spending. Net net, Foot Locker’s biggest headwinds will significantly ease in the back-half of the year, clearing the way for a big rally in depressed, beaten-up and dirt cheap FL stock.
The Catalyst: Delivery rebound
The Thesis: Shares of electric vehicle maker Tesla (NASDAQ:TSLA) have been under immense pressure in 2019 as the company’s growth trajectory has fallen flat. Specifically, delivery numbers for Tesla fell from late 2018 to early 2019, while competing models gained market share. Investors freaked out, and TSLA stock plunged.
But, there are signs emerging that indicate that Tesla vehicle demand is ramping back up from the depressed early 2019 levels. At the same time, there are also signs that Tesla remains the runaway leader in the U.S. EV market, and competitors aren’t gaining that much ground. There is also a Model S refresh coming soon, and hope that new Model Y production will start in late 2019.
Broadly, the TSLA growth narrative hit a snag in early 2019, but appears to rebounding nicely from that trough. Summer 2019 numbers should be markedly better than early 2019 numbers. Bad early 2019 numbers caused a huge sell off in TSLA stock. Better summer 2019 numbers should spark a rebound.
The Catalyst: Strong subscriber numbers
The Thesis: Shares of streaming giant Netflix (NASDAQ:NFLX) had a big rally to start the year. But, ever since late January 2019, NFLX stock has traded largely sideways as investors have tried to balance continued strong numbers with a stretched valuation and forthcoming competitive risks.
This balancing act should end soon. The key with NFLX stock is to follow the content. When the original content pipeline is strong in a certain quarter, the subscriber trends in that quarter are usually similarly strong. The opposite is true, too. Fortunately, over the past several months, Netflix’s original content pipeline has been about as good as it has ever been, both on its face and relative to the competition.
This strong content pipeline will produce strong Q2 subscriber numbers. Furthermore, a healthy content line-up into the back-half of 2019 will produce a strong Q3 subscriber guide. Strong Q2 sub numbers and a healthy Q3 sub guide will lead to NFLX stock breaking out of its sideways trading pattern.
Dave & Buster’s (PLAY)
The Catalyst: Rate cut
The Thesis: Arcade and restaurant owner Dave & Buster’s (NASDAQ:PLAY) has suffered from a sideways stock for several years now. Since late 2015, PLAY stock has bounced between $30 and $70. Ultimately, though, it has made no sustainable upward progress. In late 2015, this was a $40 stock. Today, PLAY trades hands around $40.
The trouble with Dave & Buster’s is that growth is slowing. Back in 2015, Dave & Buster’s was winning big thanks to a huge pivot towards experience-oriented spending. That tailwind has dried up, and this company has gone from 8.9% comparable sales growth in 2015, to 3.3% in 2016, flat in 2017 and a 1.6% loss in 2018. As comparable sales growth has consistently decelerated, the stock has failed to gain ground.
But, comparable sales came in at a loss of 0.3% in the first quarter of 2019, better than last year’s 1.6% decline. Further, management is guiding for a loss of 0.5% comparable sales growth this year, which is also better than last year’s 1.6% decline. And the forthcoming Fed rate cuts give potential upside to that -0.5% guide.
In other words, in 2019, the trend should reverse course for Dave & Buster’s. Slowing comparable sales growth will turn into rebounding comparable sales growth, and that trend reversal should cause a similar reversal in PLAY stock.
Canopy Growth (CGC)
The Catalyst: Edibles, extracts, & topicals
The Thesis: Canadian cannabis giant Canopy Growth (NYSE:CGC) has had a really good 2019. Over the past several months, it has become increasingly obvious through continued Canadian market dominance, key acquisitions, and certain legal developments, that Canopy projects as the leader in a potentially very large global cannabis market. As Canopy has gained long term growth visibility, CGC stock has rallied. Year-to-date, shares are up 50%.
But, CGC stock is also 25% off recent highs as the Canadian cannabis market continues to fight through growing pains. The latest growing pain? Continued supply shortages, and an inability to transfer illicit sales into the legal channel. These struggles weighed on Canopy’s early 2019 numbers, and CGC stock has subsequently sold off from its recent highs.
The numbers will get better in the back-half of the year. Specifically, Canada is set to legalize cannabis edibles, extracts, and topicals later this year. The introduction of these new products into the market will do two things. First, it will boost demand. Second, it will increase margins, since these products have higher margins than dried flower.
Overall, then, the introduction of edibles, extracts, and topicals into the legal Canadian cannabis market will provide a lift to Canopy’s numbers in the back-half of 2019, and that lift should translate into a rally for CGC stock.
As of this writing, Luke Lango was long BABA, FB, CROX, FL, TSLA, NFLX and CGC.