The increasingly bearish outlook for corporate earnings in 2019 may give investors pause despite the S&P 500’s best-performing January in decades. Given that reality, several strategists say investors should focus on owning - and buying - stocks positioned for strong long-term growth given the uncertain outlook. "Be wary of the bounceback stocks have seen since December,” says Merrill Lynch’s former chief investment strategist Richard Bernstein, who now manages $9 billion for his own advisory firm. “We’re later in the cycle, and things are naturally starting to slow down,” he told Barron’s.
Six companies that look promising over the long term include Stryker Corp. (SYK), Aptiv PLC (APTV), Ball Corp. (BLL), Microsoft Corp. (MSFT), Five Below Inc. (FIVE), and Spirit Airlines Inc. (SAVE), per Barron's. So far this year, aside from Microsoft and Spirit Airlines, these stocks have been ploughing ahead of the S&P 500’s year-to-date (YTD) performance of 8.70% as of Monday’s close.
6 Long-Term Winners
· Stryker: +13.01%
· Aptiv: +27.64%
· Ball: +13.05%
· Microsoft: +4.11%
· Five Below: +23.93%
· Spirit Airlines: +8.39%
Source: CNN Money; year-to-date performance as of 4pm EST 4/02.
What it Means for Investors
Amid forecasts of a slowing economy, these stocks are expected to outperform due to what investors call the secular, or idiosyncratic, nature of growth exhibited by their businesses. These companies' earnings aren't tied soley to the current business cycle, but are being driven by powerful longer-term trends.
We look at 3 of these stocks as detailed in Barron's.
Stryker, for example, is a supplier of orthopedic products as well as medical and surgical equipment, and is shielded from key competitive threats. The reason: doctors and surgeons don’t like to switch orthopedic suppliers because a change would require them to learn new procedures. There is no correlation between the business cycle and surgical operations like hip and knee replacements, so Stryker will be little affected by an economic downturn. Also, powerful long-term demand for Stryker's products will come as America's aging population needs new hips and knees.
Another stock is auto supplier Aptiv. While it's not completely immune from the business cycle, Aptiv is well positioned for long-term growth because its electrical and advanced safety systems are in high demand as cars become more automated. These strengths are expected to offset recent weakness in the auto sector that has pulled down its shares.
Spirit Airlines, one of the smaller players in the airline market, has carved out a path to long-term growth by staying competitive with its no-frills pricing strategies and combo package deals. Selling at just nine times earnings, its shares look like a bargain as revenues are growing at double-digit rates. Wall Street expects a 32% increase in earnings for all of 2018 and a 48% increase for 2019. Spirit reports earnings this Wednesday, which will be a good indicator of how it's faring in the current environment. Given the volatility of airline earnings, even an earnings miss for Spirit - or weak guidance - might prove to be a hiccup on the road to continued growth.
The January rally is giving most of these stocks a nice lift along with the rest of the equity market. But the real test for these stocks may not be until the end of this year and into 2020 when their true strength will be expected to show amid a slowing economy and lower overall corporate profits.