The stock market was scorching hot in 2019. The S&P 500 gained about 30%, marking its best year since 1997. Several factors helped power the market to new highs, including rate cuts by the Federal Reserve and an easing of trade tensions between the U.S. and China.
This next year, however, likely won't be quite so kind to investors. The U.S. is gearing up for an impeachment trial of President Trump in the spring and a likely contentious election this fall. With those prospects looming, stocks could be much more volatile in 2020.
Despite this backdrop, we still see some excellent opportunities for investors in the coming year. We asked a team of Motley Fool contributors for their top stocks to buy this January. They chose Pinterest (NYSE:PINS), Vertex Pharmaceuticals (NASDAQ:VRTX), CalAmp (NASDAQ:CAMP), Peloton Interactive (NASDAQ:PTON), and Energy Transfer (NYSE:ET).
A "broken" IPO
Brian Feroldi (Pinterest): Pinterest, which considers itself to be a "visual search engine," came public earlier this year. While the share price initially popped after its IPO, the stock has since been sold off hard in the last few months along with many other high-growth stocks.
I think that's providing opportunistic investors with a great chance to get it.
But why should investors favor Pinterest over other social media companies such as Facebook, Snap, or Twitter? Consider these interesting statistics about Pinterest's users:
- 91% of them believe that Pinterest is "filled with positivity."
- 85% say that they visit Pinterest "to start a new project."
- 89% of users say they leave the site "feeling empowered."
- 80% of U.S. moms are users.
- More than half of U.S. millennials are on Pinterest.
I think that these numbers are highly attractive to potential advertisers, especially those that don't want their brands associated with the negativity that plagues other social media sites.
Pinterest's third-quarter 2019 financial results suggest that the platform is successfully attracting new users and advertisers. Revenue grew 47% to $280 million, and monthly active users grew 28% to 322 million. The growth was strong enough to allow Pinterest to generate non-GAAP profits.
I think that strong growth can continue for years to come for two main reasons:
First, Pinterest is still growing its user base rapidly, particularly in international markets. While 322 million users sounds like a big number, it's still less than 10% of all the 4.5 billion people who are currently online. I think that the user base can continue to grow rapidly as more people learn about the benefits of becoming a "pinner."
Second, Pinterest's average revenue per user (ARPU) was just $0.90 in the third quarter of 2019. For context, the average Facebook user was monetized at $7.26 during the same period. That tells me that there is lots of room ahead for Pinterest to monetize its current user base.
When these two factors are combined, I think that Pinterest is poised to grow its revenue and profits at a substantial rate over the next decade. If I'm right, Wall Street will eventually catch on, and investors who buy today could earn a multibagger return.
Meanwhile, the recent sell-off has caused Pinterest to trade below its IPO price, which has pulled its valuation down below 10 times trailing sales. While that can't be viewed as classically "cheap," I think that Pinterest is a high-quality growth stock that deserves its premium price tag.
The best biotech stock on the market
Keith Speights (Vertex Pharmaceuticals): Highly profitable. Huge cash stockpile. Tremendous moat. Fantastic growth prospects. Those are the main reasons I think Vertex Pharmaceuticals is the best biotech stock on the market and a top stock to buy in January.
The anchor behind Vertex's success is the company's monopoly in treating the underlying cause of rare genetic disease cystic fibrosis (CF). Vertex now has four CF drugs approved in the U.S. thanks to the FDA giving a thumbs-up to Trikafta in October, several months earlier than expected.
No other company has an approved drug that addresses the underlying cause of CF. The closest major rival is AbbVie (NYSE:ABBV), which is evaluating a triple-drug CF combo in an early-stage clinical study. But Vertex has a massive head start over AbbVie.
Vertex should be able to win approvals in other countries for Trikafta. Assuming it does, the biotech will likely expand its addressable patient population by more than 50% over the next few years.
Thanks to fast-rising sales for its other CF drugs, Vertex sat on a cash stockpile of $4 billion at the end of September. It has used its cash in part to fund partnerships and acquisitions to expand its pipeline. Vertex is partnering with CRISPR Therapeutics (NASDAQ:CRSP) to develop gene-editing therapies targeting rare blood diseases beta thalassemia and sickle cell disease. It also made two key acquisitions in recent months, announcing a $245 million buyout of Exonics Therapeutics in June and a $950 million purchase of Semma Therapeutics in September.
Vertex now claims 10 early- or mid-stage programs in its pipeline. Three of them target CF. Five target other rare genetic diseases. The company also is evaluating a pain drug that it hopes to advance to late-stage clinical testing.
Wall Street analysts think that Vertex will grow its earnings by close to 30% annually over the next five years. But that could just be the beginning of its growth. If some of its pipeline candidates are successful, Vertex could be the best biotech stock for a long time to come.
A cheap tech stock with a long growth runway? Yep, that exists!
Sean Williams (CalAmp): Over the past 25 years, one hot investment trend after another has been overhyped and not given the proper time to mature. In recent years, it's been the Internet of Things (IoT), which is a mammoth long-term opportunity that simply needs time to find its footing. It's this steady maturation process, enormous IoT opportunity, and now realistic view from investors that has me excited about CalAmp.
Over the past year, CalAmp, which supplies mobile and industrial IoT telematics and provides cloud-based software as a service (SaaS), has dealt with a number of issues. For example, the U.S.-China trade war has adversely impacted the telematics segment due to the fact that a majority of its products were sourced from China. Additionally, worldwide vehicle sales are coming off of their highs, which isn't great news for a company that leans on smart vehicle technologies. The good news is that CalAmp's management team isn't sitting on its hands.
Throughout 2019, CalAmp has significantly reduced its reliance on China for its telematics segment. Initially deriving 70% to 80% of its goods from China at the beginning of the year, CalAmp has reduced its sourcing from the No. 2 economy in the world by GDP to around 50%. This should mean fewer trade spat-related disruptions and far more cost certainty.
CalAmp also notes that its biggest customer, heavy-equipment producer Caterpillar (NYSE:CAT), is on the cusp of upgrading its fleet from 3G to LTE connectivity. New orders from CalAmp's top customer will likely help CalAmp surpass Wall Street's expectations at some point in 2020.
But perhaps the biggest catalyst of all is CalAmp's emphasis on SaaS. In the most recent quarter, the company saw SaaS sales grow by 67% year over year, with cloud-based software now accounting for 35% of total sales. Subscription revenue is highly predictable and should help remove the occasional revenue lumpiness that CalAmp contends with as its telematics customers go through technology upgrade cycles.
Long story short, after watching it lose more than 60% of its value over the last two years, I believe we're finally seeing CalAmp's business segments mature. Rising SaaS as a percentage of total sales provides a healthy floor, while less reliance on Chinese goods removes a lot of near-term cost uncertainty.
Riding higher for 2020
Dan Caplinger (Peloton Interactive): Health and wellness have been big trends in recent years, and keeping fit is an important part of many people's lifestyles. Peloton Interactive aims to make exercise more accessible and interactive to higher-end customers by introducing home fitness equipment that includes access to professional fitness classes. With the technology that Peloton includes in its stationary bikes and treadmills, you can enjoy an interactive exercise experience in which you're directly competing against other users wherever they are.
Peloton just went public a few months ago, but it's already growing at a solid pace. The company now counts about 563,000 subscribers among its paying customer base, with users of its app bringing its total membership count to more than 1.6 million people. Peloton managed to double its quarterly revenue in just the past 12 months, and it's doing a good job of holding onto the customers it brings in, with retention rates of 94% on a 12-month basis.
Moreover, Peloton users are finding more ways to get value from the service. The number of workouts per subscriber has been on the rise, with year-over-year gains from 8.9 to 11.7 per month in the company's most recent quarterly results.
A controversial ad brought Peloton some grief during the holiday season, but many dismissed the incident as having little impact on its core user base. Meanwhile, Peloton is offering customers the chance to use Peloton equipment on a free 30-day trial basis, giving them an introduction to the service and its benefits. Once people get to use the Peloton interactive platform, it's hard to go back to regular fitness equipment -- and Peloton is banking on that leading to increased customer growth.
Peloton is also aiming to expand its product line. Facing some criticism because of the high price tags for its products -- $2,245 for stationary bikes and $4,295 for treadmills -- Peloton is looking to offer a lower-cost treadmill option as well as a rowing machine alternative. Doing so could help the company break out of the reputation it has for serving only rich customers, and introducing a broader set of exercising users would help support the key interactive workout part of the business, which benefits from having more people on the service. Also, plans to introduce apps for those who have wearable devices could drive more users onto the Peloton platform.
In many investors' eyes, Peloton hasn't been a successful stock, as the share price has had trouble staying above the $29 per share at which it priced its initial public offering. Plenty of skeptics believe that Peloton is doomed to failure, and they're betting aggressively against the stock at its current price. Yet there are a lot of high-end customers who can afford to buy Peloton equipment, and the company's growth shows that many of them see the benefits of the company's interactive experience. As network effects build, it's likely that Peloton will see continued growth heading into 2020 -- and shareholders hope the stock will follow suit.
Deep value in a heated market
Matt DiLallo (Energy Transfer): This past year has been an odd one for the energy market. Crude prices rebounded more than 35% as major producers like OPEC kept a lid on their production, which typically would fuel big gains in energy stocks. However, the average one only managed to generate a 5% return as measured by the Vanguard Energy ETF. That significantly underperformed not only oil but also the S&P 500, which was red hot as it gained about 30% on the year.
While there were several lousy performers in the energy sector, one that stood out was midstream behemoth Energy Transfer. The master limited partnership (MLP) declined by about 2% -- and is now down 30% in the last three years -- even though its earnings have been growing briskly. They're on track to rise by about 16% in 2019 and have expanded by an 18% compound annual rate since 2015.
That fast-paced earnings growth in the face of a slumping stock price has pushed Energy Transfer's valuation down to a ridiculously cheap level. The MLP currently trades at about 8 times earnings, which is low even in the beaten-down energy sector, where most midstream companies sell for more than 10 times earnings. Because it's so cheap, Energy Transfer's dividend yield has risen to more than 9%. While a payout that high is often a warning sign, that's not the case here, since it's generating enough cash to cover it by a comfortable 1.98 times.
That combination of value, yield, and growth -- earnings could rise by double digits again in 2020 -- makes Energy Transfer one of the more compelling opportunities this January. Its yield and earnings growth alone set it up to potentially generate a 20% total return in 2020, making it a great stock to buy to start the year.