Past growth never guarantees future returns. Nonetheless, investors should understand why certain stocks rallied sharply over the past year, while others floundered.
Today, three of our top investors will examine the massive rallies in Abercrombie & Fitch (NYSE:ANF), Micron Technology (NASDAQ:MU), and Caterpillar (NYSE:CAT), and discuss whether they can keep climbing this year.
A remarkable comeback in retail apparel
Leo Sun (Abercrombie & Fitch): Shares of Abercrombie & Fitch rallied nearly 50% last year, and more than doubled over the past 12 months. The apparel retailer staged that comeback on two straight quarters of year-over-year revenue growth, which broke a multi-year streak of top-line declines.
CEO Fran Horowitz-Bonadies, who took over in early 2017, pivoted Abercrombie's focus away from its A&F brand and focused more heavily on the growth of Hollister. As a result, Hollister started generating higher sales than Abercrombie's namesake brand.
Abercrombie remodeled Hollister stores, and promoted the brand with a renewed focus on adult shoppers, marketing activities across the music, video, and gaming industries, and the use of social media influencers. A&F launched new prototype stores and a fresh marketing campaign to "reset and reshape" the brand.
Abercrombie reduced its brick-and-mortar footprint, shuttering over 400 stores since 2010. It pivoted toward direct-to-consumer and e-commerce channels, and expanded heavily in higher-growth markets like China.
These efforts enabled Abercrombie to post positive comps growth for two straight quarters, with 4% growth in the third quarter and 8% growth in the fourth quarter. During the fourth quarter, Hollister's comps rose 11% as A&F's comps grew 5%.
Wall Street expects A&F's revenue and earnings to rise 2% and 25%, respectively, this year. However, A&F doesn't look cheap at 27 times forward earnings -- especially when its peers with comparable growth, like Gap and American Eagle Outfitters, trade at much lower multiples.
Remember this stock
Dan Caplinger (Micron Technology): Micron Technology was up 88% in 2017. The memory-chip specialist can attribute most of its success to the cyclical nature of its niche in the technology sector. Supply and demand of memory chips rises and falls dramatically over the course of a given cycle, and lately the need for memory in applications related to cloud computing, data centers, and mobile devices has far outpaced the supply of available chips. Conditions have been favorable enough that Micron has even decided to make capital investments to boost production capacity, expecting further supply bottlenecks in 2018 to justify the spending.
What happens in the future depends on a number of factors. On the positive side, Micron is looking to lead the shift toward high-bandwidth memory, which will open up the company's opportunity to serve customers seeking to pursue new solutions in artificial intelligence, machine learning, and other areas in which it's critical to have as much computing power as possible. Yet there's a danger that other players in the memory space will also look to boost commodity memory-chip production capacity at the same time as Micron, flooding the market in the long run and leading to the next downward phase of the cycle. For now, it looks like 2018 should sustain good conditions for Micron, but investors should keep their eyes open to make sure a future downturn doesn't take them by surprise.
A U.S.-China trade war could prove costly
Neha Chamaria (Caterpillar): After a painfully long lull, Caterpillar turned out to be one of the biggest surprises of 2017. Shares of the heavy-machinery giant, which has struggled with declining sales and profits ever since the commodities bubble burst, soared 70% last year.
Caterpillar's rally wasn't a fluke, of course. Demand for equipment picked up from key end markets, such as mining and oil and gas, as the prices of key commodities bottomed out. A languishing mining sector was the biggest hurdle for Caterpillar in recent years. At the same time, robust demand from international markets, especially for construction equipment, further boosted the company's prospects.
On the micro front, management's aggressive restructuring efforts to cut costs renewed investor confidence that Caterpillar is positioned better than ever to ride out the downturn. One big trigger for the stock last year was Caterpillar's unbreakable streak of beating earnings estimates quarter after quarter. While management's conservative guidance helped, it would only be fair to say that not many saw the dramatic recovery in Caterpillar's sales coming.
In fact, the recovery is so fast-paced that Caterpillar expects to earn nearly as much in earnings in fiscal 2018 as it earned during its peak profit years in 2012 and 2013. Here's the catch: Caterpillar may have to tone down its expectations if President Trump's proposed tariffs on imported steel and aluminum come to fruition or the ongoing trade war with China gets uglier. Caterpillar could be hit multiple ways, including higher input (steel) costs and lower exports. Now that's a real threat, and could cap growth in Caterpillar stock this year.