Stocks have had a good 2019. Through the first half of the year, the S&P 500 was on track for its best year in over two decades. To be sure, gains have been muted in the third quarter. But with the S&P 500 up 20% year-to-date, stocks are still having one of their best years this century.
One bullish sign about this rally is that the leadership in the S&P 500 in 2019 is very diverse. That is, the individual stocks which are leading the market higher are not concentrated in one industry — rather, they are a from a broad array on sectors.
That’s bullish because it shows that the market rally this year has breadth. You don’t just have one boat or one group of boats rushing ahead of the rest. Instead, the whole sea is rising here, and when the whole sea is rising, that is often a dynamic that is tough to stop.
With that in mind, let’s take a look at the best stocks of 2019 so far, and see where these stocks could go next.
Year-to-Date Gain: 85%
Through September, the best performing stock in the S&P 500 is Chipotle Mexican Grill (NYSE:CMG).
Shares of the fast casual Mexican eatery have rattled off an 85% gain this year, thanks to the company’s turnaround gaining impressive momentum throughout the year. Specifically, new management has doubled down on three growth initiatives — revamping the menu with exciting new options, expanding reach by building out the digital business and re-branding the chain with a new marketing campaign. Those three growth initiatives have all worked, and Chipotle has reported hugely positive comps all year long, which has fueled the huge gains in CMG stock.
Going forward, this rally could persist. After all, nothing is wrong with the Chipotle growth narrative. The turnaround is powering full steam ahead, and for the foreseeable future, the company should comp positive and report big profit growth. In theory, those strong numbers should keep CMG stock on its winning trajectory. But I’m concerned about valuation. At 60-times forward earnings, Chipotle stock is one of the most richly valued restaurant stocks I’ve ever seen — and I think upward moving fixed income yields could pressure that extended valuation in a big way.
As such, while the rally in CMG stock could persist into the end of the year, I don’t think it will. Instead, I think CMG stock could give back some gains over the next few months.
Year-to-Date Gain: 74%
Through September, the second best S&P 500 stock is Hess (NYSE:HES).
The energy company focused on crude oil and natural gas exploration and production has seen its stock rise nearly 75% in 2019 for two simple reasons. First, you have surging oil prices. WTI Crude Oil prices are up more than 25% year-to-date, thanks to improving global economic conditions firming up demand and certain one-off catalysts short-circuiting supply (such as the recent attacks in Saudi Arabia). HES stock has naturally rallied with rising oil prices. Second, Hess owns a 30% stake in a huge oilfield in Guyana that projects to be one of the most lucrative oilfields in recent memory. As this oilfield has inched close towards being operable, HES stock has moved higher.
Can the rally continue? I have my doubts. The trailing price-to-sales multiple on HES stock is now at a 2019 high, while the dividend yield is at a 2019 low. Thus, the stock is richly valued by historical standards, meaning investors are pricing in higher oil prices for the foreseeable future and huge upside from the Guyana project. The latter will probably materialize. I’m unconvinced on the former, as it appears countries globally are ready to inject supply where needed to keep oil prices from rising too much.
As such, while HES stock could continue to move higher from here, further gains will be reliant on oil prices moving higher.
Year-to-Date Gain: 73%
The third best S&P 500 stock through September is Lam Research (NASDAQ:LRCX).
Shares of the semiconductor equipment giant have risen by more than 70% this year as investors have realized that the semiconductor downturn everyone was expecting in 2019, isn’t as bad as feared. That is, LRCX dropped big in late 2018 to multi-year lows and a dirt cheap valuation as investors anticipated that a global economic slowdown would kill semi equipment demand in 2018/19. It has. But the damage has been relatively muted and a recovery already appears to be underway. As such, LRCX has benefited from both multiple expansion and upward estimates revisions in 2019 – the sum of which is how Lam Research stock has rattled of a 73% YTD gain.
LRCX should continue to move higher from here, albeit at a slower pace. That’s because only one of the stock’s two growth drivers will remain in play. The multiple expansion tailwind has dried up, since at 17-times forward earnings, LRCX is trading at its richest valuation in years. But the upwards estimates revisions tailwind has not dried up. Global economic growth trends are improving, and as they continue to improve over the next few quarters, the semi market should continue to bounce back – which should lead to analysts upping their forward revenue and EPS estimate for LRCX.
Big picture – while the best of the LRCX rally is in the rear-view mirror, this stock still has some gas left in the tank to head higher over the next few months.
The fourth best S&P 500 stock through September is Copart (NYSE:CPRT).
While the U.S. auto market may be having a tough time in 2019, online car auction company Copart is not. The company has rattled off three straight strong quarters in 2019. Revenue growth has accelerated higher through each of those quarters. Margins are powering higher, too. Profit growth has been robust. In other words, Copart has been firing on all cylinders in 2019, despite a weak auto market backdrop, and that divergence has helped CPRT stock soar by more than 70% this year.
This rally has more firepower left. Copart has leveraged its unique value prop in the auto industry to transform into a steady 20%-plus revenue and profit grower. For that 20%-plus revenue and profit growth, CPRT stock trades at just 30-times forward earnings. That’s a fairly reasonable multiple to pay for 20% growth. So long as the U.S. economy remains healthy and continues to support 20%-plus profit growth at Copart – which it should for the foreseeable future – then CPRT stock has room to move higher.
Year-to-Date Gain: 71%
The fifth best S&P 500 stock through September is Western Digital (NASDAQ:WDC).
Owing to its broad exposure to favorable growth trends in data creation, accumulation and storage, data storage giant Western Digital has been a Wall Street favorite for a long time. In 2018, Western Digital lost Wall Street’s favor as growth turned sharply negative amid a broad data storage market slowdown. WDC stock shed more than 70%. But in 2019, there have been signs of improving conditions in the flash market, and the consensus belief is that a trough is close. As Western Digital has neared this inflection point, investors have gobbled up shares in anticipation of a big recovery in 2020.
Will the rally continue? It hinges entirely on whether or not that big recovery in 2020 actually materializes. If it does, WDC stock could fly much higher – the stock is still 40% off its early 2018 highs. If it doesn’t, WDC stock could give back most of its 71% year-to-date gain. Fortunately for WDC bulls, I think the big recovery will materialize, given that global economic conditions are improving, trade tensions are easing, global business confidence is improving, and fiscal stimulus is on its way to help juice economic activity.
Consequently, while WDC stock is unequivocally a high-risk, high-reward play here, I think the reward part has more merit than the risk part at this point in time.
Year-to-Date Gain: 70%
The sixth best S&P 500 stock through September is KLA (NASDAQ:KLAC).
Much like Lam Research, KLA is a semiconductor equipment stock which has materially outperformed in 2019 because the slowdown in the semi market hasn’t been as bad as feared and looks to be over pretty soon with sizable catalysts on the horizon, such as 5G. As such, the consensus belief is that KLA’s growth trajectory will materially improve over the next few years, and investors are gobbling up KLAC stock ahead of that big improvement.
The rally continuing here will depend on how much KLA’s growth trajectory improves. At present, KLAC stock trades at 16-times forward earnings, which is a multi-year high valuation for this stock. In order to justify that above-average multiple, revenue and profit growth need to accelerate meaningfully from here. If they don’t, KLAC stock could give back a bulk of its gains.
Fortunately for KLAC bulls, I think revenue and profit growth will accelerate meaningfully, as 5G and IoT tailwinds converge on improving global economic conditions in 2020 to create a robust semi equipment spending environment. If that does happen, KLAC stock should stay in rally mode for the foreseeable future.
Year-to-Date Gain: 68%
Last on this list of best S&P 500 stocks of 2019 is Advanced Micro Devices (NASDAQ:AMD).
Shares of CPU and GPU company AMD have been red hot for a while now. In 2018, this was the S&P 500’s top stock. In 2019, it’s the seventh best performing stock. This consistent strength comes down to one thing – market share expansion. Over the past few years, AMD – a historically small and largely irrelevant player in the CPU and GPU markets – has dramatically increased its presence in the CPU and GPU markets, and as the company has, revenues and profits have marched meaningfully higher. This big growth has powered equally big gains in AMD stock.
This rally should continue into 2020. At present, AMD projects to keep winning share in the CPU and GPU markets for the next several quarters. So long as the company keeps doing this, growth rates will remain robust, and investors will salivate over the long term potential. That is a winning combination which should ultimately keep AMD stock on a winning path.
Thus, when it comes to AMD stock, it’s all about market share expansion. So long as this company keeps winning market share, AMD stock will stay on an uptrend.