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Stocks  | December 23, 2019

2019 has been an excellent year for U.S. stocks to buy. The S&P 500 has risen 27.3% so far this year. It and other broader market indices trade at all-time highs.

Unsurprisingly, most stocks have performed well this year. Just 14% of S&P 500 components have declined year-to-date. 27 of the 30 members of the Dow Jones Industrial Average have gained.

Not every name has joined in the rally, however. There are some sectors that have lagged. It’s been an ugly year for energy stocks, and even worse for cannabis plays. Many of 2019’s initial public offerings have disappointed. And other stocks, whether due to external factors or poor execution, have stumbled in 2019.

Many of 2019’s losers likely will continue to struggle in 2020 and beyond. After all, this has been a market where investors have done better to pick the winners, and bet on growth, rather than hope for a recovery. But there are stocks that simply had a bad year — and look set for a potential recovery as the calendar turns. These 10 stocks all have declined so far in 2019, but have hopes for a brighter 2020.

Pfizer (PFE)

YTD Performance: -10%

The case for Pfizer (NYSE:PFE) is relatively simple. Investors can own one of the world’s largest pharmaceutical companies at 13.5x estimated 2020 earnings. And in a low interest rate environment where the 10-year Treasury bond yields less than 2%, those investors can realize a 3.9% dividend yield following a recently announced 5.6% hike.

The case against PFE stock is almost as simple: that bull case simply hasn’t played out all that well in recent years. PFE shares have gained just 23% over the past five years, underperforming the S&P 500’s 55% rise.

Meanwhile, the pharmaceutical business may not be the safe haven investors once believed it was. Rival Merck (NYSE:MRK) should grow its near-term earnings at a faster clip, and it has been the much better stock in recent years. In a market where the winners keep running and the losers seemingly fall behind, MRK might be the better choice.

From here, however, Pfizer stock looks like an attractive pick, particularly for investors looking for income and some downside protection. Pfizer’s valuation is about as reasonable as it gets. It has underperformed the market — but that’s not necessarily a surprise given broad market gains. The case for PFE isn’t necessarily that it’s suddenly going to soar. It’s that it should deliver solid returns in a strong market and hold up well if this ten-year-old bull market shows any signs of stress.

Walgreens Boots Alliance (WBA)

YTD Performance: -14%

Pfizer and Walgreens Boots Alliance (NASDAQ:WBA) are two of the Dow Jones’ three losers this year (3M (NYSE:MMM) is the other). The bull cases for both stocks are somewhat similar. Investors can own a quality business at an attractive multiple: WBA trades at less than 10x FY21 earnings per share estimates.

The risks are similar as well. While Pfizer stock has underperformed, Walgreens stock actually has declined: shares are down nearly 40% from 2015 highs. The declines have resumed in recent session as takeover speculation has cooled.

All that said, there’s an interesting case here. Other pharmacy names actually have rallied of late, with CVS Health (NYSE:CVS) and even Rite Aid (NYSE:RAD) showing signs of life. Margin compression should ease at some point, assuming reimbursement pressures moderate and generic drug development picks up again. And Walgreens probably has some levers to pull in terms of either rationalizing its store fleet or cutting costs.

Buying the dip in WBA admittedly hasn’t been a great strategy for most of 2019 and for most of the last four years. The bet here is that 2020 will be different, but investors should keep in mind the possibility that it won’t be.

DuPont (DD) and International Flavors & Fragrances (IFF)

YTD Performance: -16% (DD), -9% (IFF)

The split of DowDuPont into DuPont (NYSE:DD), Dow (NYSE:DOW) and Corteva (NYSE:CTVA) hasn’t worked out quite as well as investors hoped. Investors who owned DowDuPont at the start of the year are actually down a bit on their investment so far: DOW shares have rallied 9%, but CTVA is down 4% and DD has declined 16%.

But DD stock got some good news this week when it agreed to combine its nutrition unit with International Flavors & Fragrances (NYSE:IFF). DuPont will get a cash payment of $7.3 billion, and its shareholders will own a bit over half of the new company.

The hope for DD stock is that this deal finally allows the proverbial dust to settle. At 15x forward earnings, DuPont stock is reasonably valued. Support has held repeatedly around current levels. The IFF deal looks like a winner, and in 2020 the perceived benefits of the Dow-DuPont merger/breakup plan should start to play out.

IFF has a bull case as well. Shares fell 10.4% on the merger announcement but have crawled back as some investors see value. The combined company will be a giant in its industry. Synergies should help profits going forward. M&A always is risky, so IFF is the more aggressive play. But if the deal works out, shares could have enormous upside.

Spirit Airlines (SAVE)

YTD Performance: -29%

I expect airline stocks like Spirit Airlines (NYSE:SAVE) to do well in 2020. I chose the U.S. Global Jets ETF (NYSEARCA:JETS) as my pick for the Best ETF of 2020. The economy is solid, competition is rational, and demographics favor the industry, as younger customers prefer experiences like travel to material possessions.

In that context, there are bull cases for all the major U.S. airlines. But the pick here is SAVE stock, in part because it was far and away the sector’s worst performer in 2019, losing almost 30% of its value YTD.

Operating performance admittedly has been a bit soft of late, and needs to improve. But Spirit has room for route expansion, a large order of new planes from Airbus (OTCMKTS:EADSY), and room to lower costs and boost revenue per available seat mile.

The risks here likely are higher relative to established carriers like Southwest Airlines (NYSE:LUV), which seemingly always is a good pick, or Delta Air Lines (NYSE:DAL). But the rewards are higher, too — and if the sector is set to rally, it makes sense to choose the name with the most potential upside. SAVE looks like that name.

Chewy (CHWY)

Performance Since First-Day Close: -16%

As noted, this year’s batch of IPOs hasn’t performed particularly well, and Chewy (NYSE:CHWY) is not an exception. Unlike the highest-profile new issues, Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT), CHWY stock does trade above its IPO price of $22. But shares still are down 16% from their first-day closing price, and 22.5% from their opening price of $36.

The declines don’t seem surprising given a cursory glance at the stock. Chewy will remain unprofitable this year even on an Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) basis. Competition is intense, with giants like Walmart (NYSE:WMT) and Amazon (NASDAQ:AMZN) obvious rivals in e-commerce. Even PetSmart, which acquired Chewy for $3.4 billion back in 2017, now is building out its own direct-to-consumer business.

But there’s an attractive long-term case here, which is why I bought shares this summer. Chewy has an incredibly loyal customer base. Over 70% of its revenue coming from autoship products, and once customers are acquired, their spend increases in a bizarrely consistent fashion.

The launch of the pharmacy business should help growth and revenue going forward. Market share remains relatively small, and marketing expense will fade as the customer base grows and the company’s mindshare increases. That combination will drive nicely higher margins and free cash flow.

Investors already are coming around to the story, as CHWY stock has rallied over the last few weeks. I expect that rally will continue in 2020.

Fastly (FSLY)

Performance Since First-Day Close: -20%

Fastly (NYSE:FSLY) is another of 2019’s “busted IPOs.” Like CHWY, shares are above the IPO price (in Fastly’s case, $16). But shares have fallen 20% from the first-day close. An investor who bought the stock at the open on its first day of trading still would be sitting on a 12% loss.

But here, too, there’s an intriguing case looking to 2020. Fastly’s “edge cloud” platform should benefit from the explosion of streaming services from Disney (NYSE:DIS), AT&T (NYSE:T), and Comcast (NASDAQ:CMCSA). Increased video content of all kinds should increase demand for Fastly’s low-latency options, and potentially allow it to take market share from the likes of Akamai Technologies (NASDAQ:AKAM) and Limelight Networks (NASDAQ:LLNW).

There are risks. FSLY stock trades at 7x next year’s revenue. Profitability is years off. Competition will be intense, and pricing in the industry generally declines over time, a risk to long-term margins. Still, this is an IPO that investors, and analysts, eagerly anticipated. It seems at least possible that optimism will return at some point in 2020.

TheRealReal (REAL)

Performance Since First-Day Close: -37%

It bears repeating: 2019 has been a minefield for IPOs. TheRealReal (NASDAQ:REAL) actually has slipped below its $20 IPO price. The secondhand retailer of luxury goods posted a weak second quarter report in August and shares haven’t quite recovered since.

But REAL stock has managed to grind higher from that month’s lows, and there’s a case for more upside ahead. Valuation has come in, even if REAL stock isn’t cheap (or yet profitable). The addressable market is enormous: potentially as much as $200 billion, according to the company’s prospectus. That suggests currently impressive growth has a long runway ahead. I wrote in July that the stock looked intriguing, if not quite compelling; at a cheaper price, that case does look more attractive.

It’s certainly possible that valuation will come in further. Competition is an issue, as TheRealReal is battling the likes of Farftech (NYSE:FTCH) and still-private Poshmark. Margins are a worry, given a labor-intensive model relative to the likes of other platform plays like Etsy (NASDAQ:ETSY). Still, as one of many 2019 IPOs selling below its initial price, REAL is worth a look, particularly for growth investors.

Aphria (APHA)

YTD Performance: -14%

To be sure, I’m not quite ready to call the bottom for cannabis stocks like Aphria (NYSE:APHA). The sector has stabilized in recent weeks, but “falling knife” concerns remain. Investors will watch early results from “Cannabis 2.0” products closely, and if there’s any disappointment at all, the intense selling in pot stocks could resume.

But for investors who believe the bottom is in, I still believe APHA stock is the play, as I wrote this month. The company has reached Adjusted EBITDA profitability. It has a narrower focus than the likes of Canopy Growth (NYSE:CGC), and lacks the balance sheet concerns of Aurora Cannabis (NYSE:ACB) or Hexo (NYSE:HEXO). The company’s management issues appear to be in the rearview mirror, and international markets can and should drive growth at some point.

Again, it may be too early for APHA stock, and sector weakness has kept the stock flat in recent months despite strong results in the last two quarters. But at the very least, I expect Aphria stock to outperform its cannabis peers — and potentially be a nice winner if the sector truly is in the process of stabilizing.


YTD Performance: -48%

From a trading standpoint, slot machine manufacturer PlayAGS (NYSE:AGS) really only had one bad day in 2019. The problem is that it was an absolutely terrible day: AGS stock fell 52% in a single session after second quarter earnings in August. That’s one of the worst one-day declines of any stock this year.

AGS stock actually has managed to claw back some of the losses, rising 46% from that day’s close. And I’d expect that rally to continue in 2020. Even after the rally of the last few months, AGS stock still looks cheap relative to peers like Everi Holdings (NASDAQ:EVRI). The expansion out of tribal-focused Class II games into Class III offerings for commercial customers should drive growth. Free cash flow remains nicely positive, even with a disappointing performance this year, and the balance sheet is manageable.

Execution does need to improve, and management’s response to the disastrous second quarter result seemed a bit tone-deaf. Still, that sell-off does look like an overreaction, and with some help from the economy and the gaming industry in 2020, AGS should be able to regain more of what was lost in August.

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