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Stocks  | December 30, 2019

We are now at the end of 2019, and what a year it has been for the stock market. A year ago, stocks could do no right. They were going through their biggest correction since 2008 amid escalating concerns that a recession was just around the corner. That recession never happened. Instead, throughout 2019, the global economic outlook has only improved.

Now, at the end of 2019, stocks can do no wrong. The S&P 500 is up nearly 30% year-to-date and presently sits at record highs.

Also in those 10 predictions for 2019, I nailed Disney’s (NYSE:DIS) big breakout year (up more than 30% year-to-date), Tesla’s (NASDAQ:TSLA) big breakout year (up nearly 30% year-to-date) and huge outperformances from Shopify (NYSE:SHOP), The Trade Desk (NASDAQ:TTD), Adobe (NASDAQ:ADBE), Roku (NASDAQ:ROKU) and Square (NYSE:SQ), among which the average year-to-date gain is over 150%.

Now, it’s time to unveil my bold predictions for 2020. Will the market have another breakout year? Or will stocks falter after a big 2019? Which stocks will do particularly well? Which stocks won’t perform up to par?

Let’s answer those questions, and more, by taking a deep dive into my five boldest predictions for the stock market in 2020.

Stock Market Predictions: Stocks Fall Flat

Why It Could Happen: I was very optimistic on stocks in late 2018 because awful was priced in, but awful was not the reality. At the end of 2019, though, we have a very different situation. Great is priced in. While great may be the reality today, it may not be the reality throughout the next 12 months.

I do believe that U.S.-China trade tensions will continue to ease into the 2020 presidential election, and that those easing trade tensions will provide a meaningful lift to the global economy. But, I also believe that at 17.6-times forward earnings (versus a five-year average multiple of 16.6), a lot of that “lift” is already priced into the S&P 500. It’s also worth noting that investors have entirely forgotten about the inverted yield curve. History says that the big pullback in stocks usually doesn’t happen until 12-18 months after an inversion. That timeline puts us squarely in the middle of 2020.

Why It Might Not Happen: The global economy will improve in 2020 thanks to easing global trade tensions. As it does, corporate leaders will become more confident. They will pour more money into the economy, which will provide more fuel for growth. Against this favorable backdrop, companies across the globe will report far better-than-expected earnings, management teams will lift their guides and analysts will keep pushing up their forward earnings estimates. Given all those favorable tailwinds, valuation might not matter in 2020. Stocks could keep pushing higher behind robust profit growth, with higher forward estimates being a justification for today’s premium valuation.

Ride-Hailing Stocks Bounce Back

Why It Could Happen: Ride-hailing giants Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) had awful initial public offerings in 2019. Since then, both stocks have been duds on Wall Street for various reasons, ranging from slowing growth, to extended valuations, to legislative and C-suite noise. In 2020, though, those headwinds should reverse course.

At both Uber and Lyft, growth has already slowed meaningfully, with recent quarterly trends implying that this deceleration is moderating and that growth rates could stabilize in 2020. International expansion at Uber and new product launches at Lyft will also help stabilize growth. At the same time, both Uber and Lyft are trading at a fraction of their IPO valuations, so expectations are significantly depressed. Legislative and C-suite noise should also ease. As stabilizing growth trends converge on depressed valuations without any optical noise, ride-hailing stocks could bounce back in a big way in 2020.

Why It Might Not Happen: UBER and LYFT stock may remain weak in 2020 if their growth trends continue to decelerate and losses continue to widen. This is unlikely. But, there is a chance that ride-hailing tailwinds continue to ease in 2020. The easing of these tailwinds could force even more promotional behavior from Uber and Lyft, the sum of which will result in weaker margins and bigger losses. If that does happen, neither of these stocks will rebound.

Cannabis Stocks Will Rebound

Why It Could Happen: Pot stocks were killed in 2019. That’s thanks to demand headwinds in the Canadian market, margin pressures from black market competition and snail-like progress on the U.S. legislation front. All of those headwinds converged on extended pot stock valuations, and caused companies like Canopy Growth (NYSE:CGC), Aurora (NYSE:ACB) and Cronos (NASDAQ:CRON) to shed more than half of their value.

In 2020, the exact opposite could happen. Demand headwinds could turn into tailwinds with the launch of cannabis 2.0 products (edibles and vapes). Margin pressures from black market competition will ease as legal supply and logistics improve. And, U.S. legislation could make meaningful progress as the House just passed the Marijuana Opportunity, Reinvestment and Expungement (MORE) Act. All of those positive developments could converge on what are now discounted valuations in the cannabis category and spark a big rebound rally in pot stocks.

Why It Might Not Happen: The 2020 pot stock rebound thesis is entirely predicated on three things: revenue trend improvements, margin trend improvements and U.S. legislation progress. But, revenue trends may not improve if cannabis 2.0 products aren’t a hit. Margin trends may not improve if legal supply and logistics improvements aren’t sufficient to compete with the black market. And, U.S. cannabis legislation may not make much progress in a Republican-controlled Senate. If those three things don’t happen, then pot stocks won’t rebound.

Nio Stock Triples

Why It Could Happen: Chinese premium electric vehicle maker Nio (NYSE:NIO) is one of my favorite high-risk, high-reward picks going into 2020 for a few reasons. First, the stock was massively beaten up in 2019, and is well positioned to soar higher on any good news. Second, China’s economy will rebound in 2020 after slowing for most of 2018 and 2019, thanks to easing U.S.-China trade tensions. Third, as China’s economy rebounds, China’s auto market will rebound, too. Fourth, China’s EV market will rebound in an even bigger way, because legislation in China remains supportive of EV adoption. Fifth, NIO’s sales trends are improving heading into 2020. Sixth, NIO is launching a new car next year, so today’s improving sales trends should persist into 2020.

Putting all that together, I think NIO stock has a reasonably good chance to more than triple in 2020.

Why It Might Not Happen: The rebound thesis in NIO stock is entirely predicated on improving U.S.-China trade relations providing a spark for China’s economy and auto sector. If that doesn’t happen — and it might not, considering how volatile trade relations have been over the past year — then NIO stock won’t rebound, because investor sentiment will remain depressed and sales trends won’t accelerate in the way they need to in order to support a multi-bag rally in NIO stock.

Beaten-Up IPO Stocks Stage a Comeback

Why It Could Happen: Many high-flying IPO stocks hit a brick wall in mid-2019 and have since dropped off a cliff. See Beyond Meat (NASDAQ:BYND), Chewy (NYSE:CHWY), Slack (NYSE:WORK), Pinterest (NYSE:PINS) and Zoom Video (NASDAQ:ZM), among many others. I think most of those stocks will bounce back in 2020.

These stocks were inarguably over-hyped following blockbuster IPOs. A few downward catalysts later, and they are all under-hyped. But, these are still great companies, pioneering change across big and valuable industries. Because of this, under-hype won’t stick around for long. These beaten up IPO stocks will bounce back in 2020, behind sustained robust growth. Of note, I particularly like Beyond Meat and Pinterest as potentially 100%-plus upside candidates for 2020.

Why It Might Not Happen: The batch of 2019 IPO stocks may remain weak in 2020 if: 1) interest rates move materially higher and create bigger valuation pressure on growth stock valuations, 2) broader stock market sentiment turns cautious amid choppy U.S.-China trade relations, and/or 3) these companies fail to make progress on the profitability front (pretty much all of them run losses today). As such, while IPO stocks look good for a big rebound in 2020, there are also multiple risks to that rebound thesis.

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