[Editors Note: this article was originally published in January 2020. It has since been updated to include the most relevant information.]
At the start of the year, I laid out a very simple reasoning for why growth stocks were due to have another strong showing in 2020. It went something like this.
There have been multiple negative headline events, such as the U.S. killing of top Iranian general Qasem Soleimani and the coronavirus outbreak in China. Those negative headline events have been bad enough to create worry in the markets, keep interest rates low, and sustain accommodating monetary policy across the globe. But, they haven’t been negative enough to truly derail the global economy. That is, it seems like investors have almost entirely forgotten about Middle East tensions, while the coronavirus outbreak is a short-term headwind whose economic impact will be constrained to a few months.
The result? A Goldilocks economy in 2020, with low rates yet sustained growth, and the likes of which will be perfect for growth stocks.
This thesis has played out perfectly so far. The iShares Edge MSCI USA Momentum Factor ETF (NYSEARCA:MTUM) — a collection of the market’s growth stocks — is up more than 7.5% year-to-date. Meanwhile, the iShares Edge MSCI USA Value Factor ETF (NYSEARCA:VLUE) is down more than 0.5% year-to-date.
More than that, the 5 growth stocks I told investors to buy at the beginning of this year have averaged a 21.5% gain in 2020, versus a mere 3.2% gain for the S&P 500. Those best growth stocks to buy in 2020 include:
- The Trade Desk (TTD) +15.9%
- Beyond Meat (BYND) +54.1%
- Square (SQ) +32.5%
- Canopy Growth (CGC) +3.7%
- Snap (SNAP) +1.5%
Will these red hot growth stocks keep rallying for the rest of the year? I think so. Here’s a deeper look at why.
The Trade Desk (TTD)
Programmatic advertising leader The Trade Desk (NASDAQ:TTD) has been one of the best-performing growth stocks in recent memory. Over the past three years, TTD stock is up more than 800%, as the company has become a bigger and more important player in the global digital ad landscape.
Long story short, programmatic advertising has turned into the future of digital advertising. As opposed to leveraging humans and guess-and-check processes to run ad campaigns, advertisers around the world are increasingly automating ad transaction processes using data and algorithms. This programmatic advertising pivot will persist in 2020, as automation tech gains more traction and digital ad spending trends remain strong.
As it does, The Trade Desk — which is widely considered the world’s best and most robust demand-side programmatic ad platform — will continue to attract more clients and grow ad spend per client. Revenue growth trends will remain robust. Profit margins will improve with scale as the company relies more on ad spend per client growth, and less on marketing spend. Profits will continue to roar higher.
At this point, it seems like the only thing that can stop TTD stock is valuation friction. Indeed, up at almost 80-times forward earnings, TTD stock does seem richly valued.
But low interest rates support this extended valuation. So long as interest rates remain low and the company maintains growth momentum — both of which will happen in 2020 — TTD stock will push higher.
Beyond Meat (BYND)
During the first half of 2019, plant-based meat maker Beyond Meat (NASDAQ:BYND) was one of the market’s best performing growth stocks. During the second half, the exact opposite happened. Beyond turned into one of the market’s worst performing growth stocks.
In early 2020, there’s been another pivot, and BYND stock has turned into one of the market’s hottest growth stocks again, with shares up more than 50% year-to-date.
Newfound strength in Beyond stock will persist for the rest of the year.
That’s because the company will sustain robust operational momentum in 2020, behind acceleration in consumer demand for plant-based meat, which will spark more rapid uptake of plant-based meat products across the food-service and grocery store channels. As Beyond Meat continues to report huge growth numbers over the next few quarters, that big growth will converge on what is a stock still well off its highs, trading in a low interest rate environment.
That’s a recipe for success. As such, early 2020 strength in Beyond Meat stock will stick around for the next few quarters.
The are four big things to like about payments processor Square (NYSE:SQ) in 2020.
First, Square is a growth stock with a growth valuation. Interest rates project to remain low in 2020, and will provide continued support for Square’s growth valuation. Second, Square’s adjusted revenue growth rates will stabilize and potentially even improve in 2020, thanks to rebounding economic activity, healthy consumer spending trends, and new product expansions.
Third, Square’s profit margins will continue to improve because the company’s higher-margin services business will become a bigger revenue contributor in 2020. Sustained big revenue growth should also drive bigger positive operating leverage. Fourth, at 87-times forward earnings for 30%-plus revenue growth and even bigger profit growth, SQ stock is one of the more attractively valued growth stocks in the market.
These four reasons are largely why Square stock is already up an impressive 32.5% year-to-date. Going forward, interest rates will remain low, Square’s growth trajectory will continue to improve, and margin expansion will persist. The valuation is more stretched today than it was at the start of the year. So, valuation friction will be more of a problem going forward.
But, perhaps not a big enough problem to derail the rally in SQ stock.
Canopy Growth (CGC)
Pot stocks had a rough go in 2019. Pot stock poster child Canopy Growth (NYSE:CGC) was no exception. Shares dropped more than 60% off their early 2019 highs. But the whole cannabis sector — led by CGC — could stage a big rebound in 2020.
The rebound thesis on CGC stock is fairly straightforward. All the things that went wrong for Canopy Growth in 2019 will go right in 2020. Falling revenue growth rates will turn into rising revenue growth rates, as demand trends in Canada stabilize thanks to the introduction of vapes and edibles products into the legal market, as well as more aggressive retail store expansion.
Compressing margins will turn into expanding margins, as black market pricing pressures ease with improving demand trends and as the pace of production capacity expansion slows. Snail-like progress on the U.S. legislation front will pick up speed in 2020 as the Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act makes its way through Washington.
Net net, Canopy’s 2019 headwinds will turn into 2020 tailwinds. This is already happening. Canopy reported third quarter numbers in February that comprised huge sequential revenue and volume growth, improving margins, and narrowing losses.
Those 2020 tailwinds will converge on what has become a hugely depressed CGC stock with a record low valuation, to spark a big rebound in shares.
Digital ad stocks are positioned to have a strong 2020, because the strength of the ad market is closely tied to the strength of the overall economy (i.e. when the economy is firing on all cylinders, companies are more comfortable spending big on advertising).
One digital ad stock which could out-perform peers in a big way in 2020 is Snap (NYSE:SNAP). Snap has been untouched by political ad scandals. By contrast, Facebook and Alphabet are feeling huge pressure to more strictly censor and even ban political ads in 2020. That means these companies are operating with their hands tied behind their backs. Snap isn’t. That puts the company in a strong position to win a ton of political ad dollars this year.
Also, Snap’s newest product innovation, Cameos, looks very similar to the face swap filter of early 2019. That face swap filter was a big driver behind the platform’s impressive user growth in early 2019, which drove huge gains in SNAP stock. The same thing could happen in early 2020. Cameos could power above-consensus user growth, which could spark another leg higher in SNAP stock.
Even further, Snap’s profit margin profile will continue to meaningfully improve in 2020 as gross margins move higher alongside more favorable ad demand trends, and as sustained big revenue growth drives positive operating leverage.
Connecting all the dots, it seems clear that Snap stock will regain its early 2019 momentum in early 2020, and sustain that momentum for most of the year.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by TipRanks, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango was long TTD, CGC, FB, and PINS.