The past 12 months have been a volatile time for the U.S. stock market, making 500-point drops and returns a daily event. The Dow Jones Industrial Average had a particularly rough time in December, falling more than 1,600 points in a single week — its worst run in a decade. Meanwhile, shareholders continue to fear an unpredictable market, unresolved tensions with China and the possibility of an economy going south. Retail stocks have been no exception.
“Investors today are less concerned about current trends and more focused on the uncertainty around 2019,” Ike Boruchow, senior analyst at Wells Fargo, wrote in a recent note. “Bears will continue to dominate the conversation for the time being, as we doubt that investors will stick their necks out on some of the hard-hit retail names into [the] new year.”
But while most of Wall Street might be fearing the worst, analysts don’t see a full-on recession on the horizon. Research firm MKM Partners described it more like a slowdown, with the pace of growth being so rapid in recent years that it will be difficult to sustain.
Still, the stock market’s roller coaster ride won’t stop anytime soon. In fact, volatility will likely be the only constant. MKM expects movement along the Vix — the index used to measure volatility, often referred to as the “fear gauge” — to rise.
That means traders need to be cautious when picking stocks in 2019.
Here are a few to consider.
1. Amazon, Tapestry and Kors
Simeon Siegel, senior equity analyst at Nomura Instinet, pointed out that all three are stocks that have seen multiples compress, or the interesting situation when earnings increase without much upward stock movement. This often leads to more value for investors.
In the case of Tapestry and Michael Kors (renamed Capri Holdings), the two companies have created a portfolio of brands that is more attractive to consumers and shareholders alike. Tapestry includes fashion businesses Coach, Kate Spade and Stuart Weitzman, while the Michael Kors company owns the namesake brand, along with Jimmy Choo and the recently acquired Versace.
Amazon, meanwhile, is becoming a “fee collector rather than a product seller,” Siegel said. Simply put, its direct retail sales are decelerating as many of its subscription services are ramping up, helping the company become even more profitable in the long term.
“I think [Amazon] will disappoint on sales, but outperform on profits,” Siegel said, because the e-commerce company won’t be selling things but rather subscriptions.
China is growing, maybe just not as fast as it was before. Still, with a steady pace, there are several Chinese e-commerce platforms that offer substantial value to investors. A few to watch include Alibaba, JD.com and Vipshop Holdings.
“These stocks offer potential upside versus current levels ranging from 26 percent up to 64 percent,” according to a Dec. 18 note from MKM Partners. The firm rated Alibaba one of its top picks for 2019.
The ath-leisure trend, donning sportswear as streetwear, is not going away. In fact, investors and consumers alike can expect more to come in 2019.
What companies should investors watch? Lululemon for one. The ath-leisure brand’s apparel offerings resonate with both female and male consumers, taking share from Nike in the process. Investors like the stock, too. It’s up more than 45 percent year-over-year.
Jen Redding, an analyst at Wedbush, raised her full-year sales and profits estimates on Lulu based on the company’s “healthy product margins” and “overwhelming demand…as well as an increase in average selling price, indicate strong gross margins behind robust holiday sales, and suggest to us potential for upside in [fourth-quarter earnings per share].”
But don’t rule Nike out. The company seems almost unstoppable despite its string of recent controversies. And its assortment of innovative footwear makes it a clear winner among sneaker fans. In its most recent earnings report, the company beat analyst expectations on both top and bottom lines. And many analysts expect the momentum to continue.
“Nike’s business is accelerating,” Michael Binetti, an analyst at Credit Suisse, wrote in a recent note. With Nike’s inventory improving, the company is “in the best position for revenue upside in years.”
Cowen & Co. rated both Lulu and Nike among its “most loved stocks” of 2019.
4. VF Corp.
Another stock favorite is apparel and footwear group VF Corp., the parent company to a broad portfolio of fashion brands including The North Face, Vans, Reef and Eagle Creek.
In a December note from UBS, analyst Jay Sole wrote that the company’s fundamentals, “at least in the U.S. direct-to-consumer channel, look solid.” Growth in The North Face and Vans, two of VF Corp.’s most popular brands, is also gaining speed, Sole said. Earlier last year, the company said revenues at its Vans brand alone will reach around $5 billion by 2023.