Author: Daniel Sparks | December 27, 2018
Searching for winners
With Christmas behind us and 2019 less than a week away, many investors are likely reviewing their financial performance and revisiting their portfolios. For investors looking for investment ideas, why not start your search in industries, sectors, and trends with tailwinds and compelling dynamics?
Of course, none of the following investing trends are guaranteed to lead to winning stock picks. Investors will want to do their own due diligence to sift through these trends and pick out stocks that are likely to be outperformers over the long haul. But the following six trends are definitely good places to start a search for promising stocks in 2019.
Cloud computing has been seeing strong momentum for years now -- and 2019 should be no exception.
To grasp how strong the growth is in cloud computing, just take a look at some stats from two cloud-computing leaders: Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ:MSFT). In Amazon's most recent quarter, the company's cloud-computing business, Amazon Web Services, saw revenue rise 46% year over year. Meanwhile, Microsoft's Azure saw revenue rise 76% over the same timeframe.
Software-as-a-service stocks have seen significant momentum in recent years. Defined as companies that provide online platforms or services to customers, software-as-a-service stocks are appealing because of their scalable business models and recurring revenue streams.
Two companies capture the underlying strength in the software-as-a-service segment. Financial software company Intuit (NASDAQ:INTU) grew revenue in its fiscal 2018 by 15% year over year, helped by the company's 40% year-over-year growth in online ecosystem revenue. Further, Intuit's fiscal 2018 revenue growth was a significant acceleration compared to its 10% year-over-year growth in fiscal 2017. Financial-technology company Square (NYSE:SQ) has been seeing its revenue growth rates accelerate, too. Third-quarter revenue was up 51% year over year, marking the company's sixth quarter in a row of accelerating growth.
Electric car sales continued to rise sharply in 2018. Sales of fully-electric vehicles, in particular, soared. To appreciate the potential in this investing trend, just look at electric-car company Tesla (NASDAQ:TSLA). As of the end of the company's third quarter, trailing-12-month vehicle sales were up a whopping 93% year over year. Further, Tesla has proven with its Model 3 -- the company's lowest-cost vehicle yet -- that electric vehicles can be built profitably at high volumes. Soaring production and deliveries of the vehicle helped the automaker swing to a profit and report free cash flow of $881 million in its third quarter.
If digital security was a hot topic in 2017, it was on fire in 2018. Social network Facebook's (NASDAQ:FB) Cambridge Analytica scandal in March, along with a handful of other high-profile digital security concerns that surfaced for the social network after this instance, has put digital security in the spotlight.
One company that has been benefitting from companies' growing appetites to keep their organization's and customers' data secure is enterprise identity-management company Okta (NASDAQ:OKTA). Revenue in the company's most recent quarter jumped 58% year over year.
With so much volatility in the stock market in 2018, many investors may want to stay away from riskier investments that aren't sustainably profitable. To help identify healthy companies, investors can look for businesses with heady and steady free cash flow, or cash from operations less capital expenditures.
Two examples of cash cows are Apple (NASDAQ:AAPL) and Starbucks (NASDAQ:SBUX). These two companies' free cash flow amounted to 24% and 40% of their trailing-12-month sales, respectively.
Another investing trend worth considering in 2019 is dividends. Stocks that pay dividends are typically profitable companies generating excess cash. Even better, good dividend stocks not only pay a regular dividend, but also increase their dividends on an annual basis. Some stocks even pay special dividends on top of their regular dividends.
Consider Texas Instruments (NASDAQ:TXN). The semiconductor company has a dividend yield (annual dividend payments as a percentage of the current stock price) of 3.3%, giving investors a nice income stream. In addition, the company has increased its dividend for 15 years straight, with its most recent dividend increase coming in at 24%.
Dividend stocks give investors cash flow even in a down market, making them nice stocks to own when volatility strikes.
A good starting point
An industry tailwind or a particular investment characteristic -- like strong free cash flow or meaty dividend payments -- won't automatically translate into winning investments. But each of these investment trends are great places for investors to get some ideas for 2019.
All of these trends possess dynamics worth looking into. Cloud-computing and software-as-a-service businesses benefit from compelling and scalable economics, electric cars and digital security are both seeing significant demand tailwinds, and stocks with strong cash flow and dividends offer investors stability in a volatile market.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Daniel Sparks owns shares of Apple, Square, and Tesla. The Motley Fool owns shares of and recommends Amazon, Apple, Facebook, Intuit, Okta, Square, Starbucks, and Tesla. The Motley Fool owns shares of Microsoft and Texas Instruments and has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and short January 2019 $80 calls on Square. The Motley Fool has a disclosure policy.