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Stocks  | January 3, 2020

2019 was a fruitful year for investors. The S&P 500 gained almost 29%. The NASDAQ Composite got up about 36%. And the gains have been broad as well as deep.

Nearly 80% of U.S. stocks with a market capitalization over $300 million have posted a positive performance in 2019. Roughly 19% of such stocks have gained more than 50%.

In a market with that kind of performance, choosing stocks that might reverse in 2020 essentially comes down to making a list of stocks to sell. After all, outside of sectors like energy and retail, it seems like every name rose in 2019. But it’s worthwhile to focus on some of 2019’s biggest gainers — which could in turn be some of the biggest losers in 2020.

That said, it’s important to remember that in this market, most winners have kept winning — while laggards have struggled to recover. Still, it does look like these 10 stocks, all of which have gained at least 50% in 2019, have run too far. And for investors who assume that market-wide performance in 2020 won’t be quite what it was this year, they may indeed be stocks to sell.

10 2019 Winners That Will Be 2020 Losers: Roku Stock (ROKU)

2019 YTD Performance: 341%

10 2019 Winners That Will Be 2020 Losers, Including ROKU Stock

To be sure, many investors have missed out on gains — or gone broke — arguing that Roku (NASDAQ:ROKU) stock is too expensive. The 341% increase in Roku stock in 2019 was the best among stocks with a market value above $10 billion. (Sea Limited (NYSE:SE) is a distant second, up ‘only’ 255%.) And for most of that run, valuation concerns have at least on occasion dogged the stock.

Meanwhile, there’s still an enormously attractive story here. Roku clearly is at the center of the shift toward streaming video. The international opportunity is large and relatively untapped. New streaming services from Disney (NYSE:DIS), Comcast (NASDAQ:CMCSA), and AT&T (NYSE:T) will drive demand for both Roku players and advertising to its customers.

All that said, valuation remains questionable and that’s become apparent in recent trading. ROKU stock actually is down 21% from early September highs. A downgrade from Morgan Stanley in early December sent shares down 15%, a decline from which the stock still hasn’t recovered. As I noted after that plunge, ROKU stock trades at a whopping 22x its “platform revenue,” which includes advertising and the company’s cut of subscription fees billed through its platform. Player revenue is, and remains, unprofitable.

Even with the recent weakness, this still seems like a stock priced for perfection. That obviously wasn’t an issue in 2019, but ROKU stock will struggle if 2020 delivers a different market.

CDW Corporation (CDW)

2019 YTD Performance: 76%

CDW Corporation (NASDAQ:CDW) seems like one of 2019’s stranger winners. To be sure, CDW is an excellent company. The IT reseller and S&P 500 component has a market capitalization of $21 billion. Growth in recent years has been solid, with earnings per share expected to rise about 16% this year.

The company was a significant beneficiary of tax reform. Those tax savings have driven better free cash flow, used to fund both a steadily increasing dividend and larger share repurchases.

Still, this is not the type of company investors generally have sought in recent years. Operating margins, even on an adjusted basis, remain in the single digits. Competition is intense. IT hardware, particularly in categories like storage, has generally been a low- or in some cases negative-growth market. CDW has posted impressive growth relative to its operating model — but, again, investors generally have looked for models with significantly higher growth expectations.

And after 2019’s enormous rally, it does look CDW stock at least needs to take a breather. Shares have raced past the average Wall Street price target. A 22x forward P/E multiple is a huge number in a sector where many similar companies trade closer to 10x or 12x. Growth almost certainly will decelerate in 2020. This is too good a company to sell its stock short, but increasingly it looks like a stock that might be too expensive to buy.

Luckin Coffee (LK)

2019 YTD Performance: 80%

10 2019 Winners That Will Be 2020 Losers

Luckin Coffee (NASDAQ:LK) has been one of the biggest winners during the most recent leg of the market rally — and for good reason. A blowout third quarter earnings report in early November sent LK stock soaring. Then, progress on the trade war front boosted Chinese stocks as a whole, and kept the rally going.

Ahead of that earnings report, LK stock was trading near its initial public offering price of $17. Shares have more than doubled since. And there’s a case for more upside ahead. Luckin aims to be the Starbucks (NASDAQ:SBUX) of China. Other big 2019 IPOs like Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) have recovered after soft early trading. On this site, Larry Ramer called out LK stock as one of 2020’s best stocks, and a week earlier Luke Lango called LK an attractive growth pick.

But as with ROKU stock, the issue isn’t the opportunity. It’s the valuation, particularly after the 100%-plus rise in less than two months. LK stock trades at a whopping 18x revenue. There are still questions about the long-term viability of the operating model. Optimism toward Chinese stocks in response to the trade deal looks a bit overdone. I’m not ready to short LK stock, which has a large short interest relative to its thin float. But — again, as with ROKU stock — it certainly seems like most of the good news here is priced in.

Bed, Bath & Beyond (BBBY)

2019 YTD Performance: 35%

10 2019 Winners That Will Be 2020 Losers

Bed, Bath & Beyond (NASDAQ:BBBY) has been one of the best stocks of the past few months. Shares gained 133% from August lows. The hiring of new CEO Mark Tritton from Target (NYSE:TGT) drove some of the optimism. Tritton already has cleaned house in an executive team that clearly hadn’t gotten the job done. At those August lows, BBBY stock traded where it hadn’t since 1997.

But Tritton himself has a lot of work to do. Comparable sales declined 6.7% in the company’s second quarter, reported just before Tritton’s hiring was announced. Fiscal third quarter results on Jan. 8 may well remind investors of just how far Bed, Bath & Beyond has to go.

Britton’s association with Target has raised turnaround hopes, but it’s important to remember that similar efforts at brick-and-mortar specialty retailers have failed.

Coca-Cola Consolidated (COKE)

2019 YTD Performance: 57%

10 2019 Winners That Will Be 2020 Losers

Coca-Cola Consolidated (NASDAQ:COKE) is a bit of an odd choice for this list. The bottler for Coca-Cola (NYSE:KO) gained 57% in 2019. But most of the gains came in at an early run during which COKE stock more than doubled. Shares still are down 29% from May highs.

But the stock is rallying again — and even with the declines, the 2019 YTD gains seem like far too much. There’s a theory, backed by some short-sellers, that investors using the Robinhood investing app are mistaking COKE stock for Coca-Cola stock. Profit growth has slowed dramatically after strong first-half performance. Case volume is up less than 2% through the first nine months of 2019.

This is a nice business — but not one that seems to support a 25x forward P/E multiple. For that multiple, investors could own the better profit margins of KO stock — and it may be that at least a few COKE shareholders think that they do.

Okta (OKTA)

2019 YTD Performance: 80%

10 2019 Winners That Will Be 2020 Losers

Software-as-a-service play Okta (NASDAQ:OKTA) stock is like ROKU stock in that there’s a simple retort to any valuation-based skepticism. Bears have questioned valuation in the past and both stocks kept rising.

On its own, the argument that any SaaS stock — or really, any growth stock — is overvalued fundamentally just hasn’t been enough. Investors have been paying up for growth for years now, and there’s not much evidence (though there is some) that is going to change any time soon.

Even with that caveat, however, I remain bearish toward OKTA stock. The company’s authentication offering is well-positioned in a world with rising cybersecurity concerns. Growth has been impressive. But at nearly 20x next year’s revenue, with 2020 growth likely in the low 30% range, OKTA is expensive even by growth stock standards. Competition will be intense, with the likes of Microsoft (NASDAQ:MSFT) and Cisco (NASDAQ:CSCO) able to leverage their existing customer bases to take market share.

OKTA stock has a good story behind it, and for growth stocks the last few years that has been enough. But the catch is that it’s not quite a great story, while OKTA is priced as if it is.

Zynga (ZNGA)

2019 YTD Performance: 55%

10 2019 Winners That Will Be 2020 Losers

Admittedly, I’ve been way wrong on Zynga (NASDAQ:ZNGA) in the past, and it’s possible there’s more upside ahead for ZNGA stock. The company’s turnaround under CEO Frank Gibeau has been impressive. After the sale of the company’s headquarters, Zynga has over $1 billion in cash that can be used for acquisitions.

Social gaming has been more resilient than I (and other skeptics) believed. Remember that in late 2015, Activision Blizzard (NASDAQ:ATVI) acquired “Candy Crush” developer King Digital Entertainment for less than 7x EBITDA (earnings before interest, taxes, depreciation, and amortization). Many observers didn’t like the deal — because the assumption was that King, and the industry, were headed for a decline. Both King and Zynga have grown nicely since.

That said, the gains in 2019 price in a lot of success. Resistance has held repeatedly at current levels. M&A always is dicey; indeed, Zynga’s biggest acquisition, the $527 million purchase of NaturalMotion in 2014, hasn’t worked out all that well. It does seem like the easy money has been made, which perhaps explains why ZNGA stock has traded sideways since May.

Winnebago Industries (WGO)

2019 YTD Performance: 119%

10 2019 Winners That Will Be 2020 Losers

Recreational vehicle manufacturer Winnebago Industries (NYSE:WGO) seems like it has more upside ahead. Valuation is reasonable: WGO stock trades at less than 12x fiscal 2021 (ending August) EPS estimates. Shares bounced over 7% after fiscal first quarter earnings just before Christmas; revenue grew 19% year-over-year in the quarter.

Winnebago isn’t alone in showing strength. RV makers have done well thanks to higher demand from baby boomers and lower gas prices. Thor Industries (NYSE:THO) gained 42%. Supplier LCI Industries (NYSE:LCII) rose 77%.

But those tailwinds will fade at some point and the economic climate will weaken. Winnebago’s CEO noted after earnings that “The biggest risk to our business is uncertainty,” and a contentious, and uncertain, presidential election looms. Meanwhile, the pool of potential baby boomer buyers will shrink, and later generations may be less interested in RV ownership.

There are risks here. In fact, despite the torrid year-to-date gains, WGO actually trades below 2017 highs — because shares lost over half their value in 2018. If there’s any weakness in the macro picture or the market in 2020, WGO and its peers could pull back sharply.

AppFolio (APPF)

2019 YTD Performance: 85%

10 2019 Winners That Will Be 2020 Losers

AppFolio (NASDAQ:APPF) is one of the many cloud-based software plays that soared in 2019. But there’s a core concern that suggests the rally has gone too far.

AppFolio’s core business is providing property management software to landlords. That’s been good business so far: revenue should grow 34% year-over-year in 2020, and AppFolio is profitable. But the addressable market in that industry simply may not be that large, while an ancillary legal business is both small and likely lower-growth.

Despite that issue, APPF trades at roughly 14x this year’s sales. Other SaaS plays with larger end markets — and thus a longer runway for growth — receive lower multiples.

It’s possible AppFolio could copy the playbook of Veeva Systems (NYSE:VEEV), which focused on a single vertical and then diversified into new end markets. VEEV faced similar growth questions, but has been one of the best multi-year performers in the sector. At this point, however, even that potential seems priced into AppFolio stock. There’s nothing wrong, necessarily, with paying such a high multiple to revenue — but at this valuation, it seems like investors can, and at some point will, find bigger potential elsewhere.

DocuSign (DOCU)

2019 YTD Performance: 85%

10 2019 Winners That Will Be 2020 Losers

DocuSign (NASDAQ:DOCU) is another of 2019’s stalwarts among growth stocks. A good chunk of its gains have come just since early September: a blowout fiscal second quarter report catalyzed a 60% rally in less than four months.

Here, too, there are worries. Valuation looks potentially stretched. Competition will be intense, with Adobe (NASDAQ:ADBE) pushing its EchoSign and Dropbox (NASDAQ:DBX) acquiring HelloSign.

It’s possible growth of any kind, at any price, will continue to be rewarded by investors. If that trend reverses, however, software stocks like DOCU could be in for a rude awakening.

A revolutionary initiative is helping average Americans find quick and lasting stock market success.

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