Often times the best performing stocks in the stock market are “reversal” stocks, or beaten up stocks that have been down for a long time, and then suddenly turn on a dime and shoot higher. These reversal stocks can often rally 20%, 40%, or 60%-plus in a matter of months while the market moves up a few percentage points during that stretch.
In other words, if you’re looking for a big winner in a short period of time, look for reversal stocks.
Finding these reversal stocks, however, can be hard, mostly because momentum is a very real thing in the market. Stocks that have been trending higher, usually continue to trend higher. Stocks that have been trending lower, usually continue to trend lower. According to research from Professor Hendrik Bessembinder of Arizona State University, the top 4% of listed companies have accounted for the entire net gain of the U.S. stock market since 1926 (in other words, winning stocks do all the winning).
As such, finding stocks that go from trending lower, to breaking out higher, can be a tall order.
But, you needn’t worry about that. I’ve done the leg work for you, and have put together a list of 10 reversal stocks that have been staging huge reversals in 2019. Some of them will stay hot. Others won’t. Let’s take a deeper look, and find out of which of these reversals are worth buying, and which are worth skipping.
Hot Stocks Staging Huge Reversals: CVS (CVS)
5-Year Peak-to-Trough Drop: 55%
Recent Rally (Duration): 20% (7 months)
Shares of pharma retail giant CVS (NASDAQ:CVS) have been stuck in a secular decline over the past five years, dropping 55% from their mid-2015 highs to their early 2019 lows, as the company has run up against multiple operational headwinds, including legislation working to lower drug prices, a big opiod crisis, and competition from Amazon (NASDAQ:AMZN) and Walmart (NYSE:WMT), among a few other things.
But, in early 2019, CVS stock got too cheap to ignore, with a decade-low forward earnings multiple of 8 and a decade-high dividend yield of essentially 4%. At the same time, pressure from Washington eased as proposed adverse changes for CVS failed to gain traction. CVS also started reporting better numbers — the company has now reported five straight double-beat earnings reports — amid a broad HealthHUB roll-out which provided differentiation from competitors.
Against the backdrop of these various fundamental improvements, CVS stock has rattled off a 20% gain over the past seven months.
Will the rally continue? Very likely, yes. The fundamental backdrop continues to improve. The numbers should remain solid. And, importantly, the stock is still dirt cheap, at almost 9-times forward earnings versus a five-year-average forward earnings multiple of 13. As such, CVS stock still has all the firepower necessary to stay in rally mode.
5-Year Peak-to-Trough Drop: 94%
Recent Rally (Duration): 67% (2 months)
Five years ago, physical video game retailer GameStop (NYSE:GME) was considered just another a fairly strong retailer that had a choke-hold on the secular growth video game industry. Since then, everything has changed. Above all else, the video game industry has shifted from physical to digital. So, instead of buying games at their local GameStop, gamers can now just download games at home through the cloud. This has led to secular erosion in GameStop’s core video game business, which has resulted in a 94% wipe-out in GME stock.
But, this secular decline has sharply reversed course over the past two months. Since August 2019, GME stock has rattled off a near 70% gain thanks to a few things. First, “The Big Short” guy — hedge fund manager Michael Burry, famously played by Christian Bale in “The Big Short” movie — threw his hat into the ring, and said his fund owned a sizable stake in GameStop. Second, it became widely known that next year’s next-gen video game consoles will still have physical disk drives. Third, investors started to get really excited about next year’s video game console upgrade cycle: just look at the stocks of Activision (NASDAQ:ATVI), Electronic Arts (NASDAQ:EA), and Take-Two (NASDAQ:TTWO) over the past few months.
Will GME stock stay hot? I think so. The valuation is still attractive — $450 million market cap, with an estimated $480 million in cash sitting on the balance sheet — and the numbers should improve meaningfully in 2020, as the first next-gen console upgrade cycle in seven years creates a rising tide across the entire video game industry. Investors will likely continue to buy ahead of that big catalyst, so long as the valuation remains ostensibly attractive, so GME stock will likely continue to rebound for the foreseeable future.
5-Year Peak-to-Trough Drop: 45%
Recent Rally (Duration): 50% (10 months)
Social media giant Facebook (NASDAQ:FB) was hit hard in 2018 by the Cambridge Analytica scandal, which turned into a global hot topic regarding how the company uses data to make billions of dollars in ad revenue. As the company’s business model and practices were put under the microscope last year, FB stock got slaughtered on concerns that this close look would result in legal or consumer action that would ultimately cause Facebook’s secular growth narrative to dry up. FB stock dropped 45% at the time.
Fast forward to late 2019. None of that happened. Governments across the world and mainstream media took a very close look, and that’s about all that actually happened. Consumers didn’t leave the platform. Advertisers didn’t pull money. Legislation didn’t get enacted which materially restricted the company. Facebook maintained its 20%-plus revenue growth trajectory, all of its users, and most of its profits. In response, FB stock has rebounded 50% over the past 10 months.
Will FB stock stay hot? Yes. If 2018 proved anything, it’s that Facebook’s digital properties are sticky — consumers don’t just use them and like them, they need them and can’t go without them. Thus, usage and ad revenue growth for the foreseeable future will remain robust. That means Facebook will remain a 20%-plus revenue and profit grower for a long time. At just 19-times forward earnings, FB stock is very attractively valued considering the company’s robust growth profile.
Stage Stores (SSI)
5-Year Peak-to-Trough Drop: 98%
Recent Rally (Duration): 280% (2 months)
The stock which has staged the biggest reversal on this list is department store operator Stage Stores (NYSE:SSI). For the past five years, Stage Stores has been thrown into the bucket of “retailers going extinct thanks to Amazon,” as the company was a largely undifferentiated retailer in a hyper-competitive retail industry that had become over-crowded and was due for some consolidation. Comps, margins, and profits were all wiped out. SSI stock dropped a whopping 98%.
Then, a turnaround strategy emerged in 2019. There are two businesses under the Stage Stores umbrella — the full-price Stage Stores department stores, and the off-price Gordman’s department stores. The full-price stores are struggling. The off-price stores are doing much better. Management’s plan? Close a bunch of full-price stores, and convert the rest to off-price stores. In this sense, management is trying to turn Stage Stores into a mini TJX (NYSE:TJX) or Ross Stores (NASDAQ:ROST). Investors have bought into the turnaround hype. Shares are up an insane 280% over the past two months.
Can SSI stock stay in rally mode? Tough to say. If the off-price pivot works, then yes. SSI stock is really cheap relative to TJX or ROST stock. But, if the off-price pivot doesn’t work, this huge 280% rally over the past two months could be just a head-fake. As such, at this point, SSI stock remains a high-risk, high-reward situation, and I don’t have sufficient clarity to say that the risks outweigh the rewards, or vice versa. The stock truly feels like a wild-card here.
5-Year Peak-to-Trough Drop: 62%
Recent Rally (Duration): 53% (11 months)
Chinese e-retailer JD.com (NASDAQ:JD) was hit hard in 2018 amid a broad and rapid slowdown in China’s economy, which resulted in JD’s growth rates slowing dramatically at the same time that the company was investing big into improving and expanding operations (so margins were taking a hit, too). In response to slowing growth and declining margins, investors sold JD stock in droves. Shares dropped more than 60% from their peak in early 2018, to their trough in late 2018.
But, over the past 11 months, JD stock has rattled off a 53% gain as the tide has turned. Specifically, China’s economy has shown signs of life recently, particularly on the consumer and digital fronts (which are what matters most to JD). As China’s economy has come back to life, JD’s revenue growth rates have stabilized and even improved some. At the same time, 2018’s big investments haven’t continued in 2019, so margins have taken a big leg up this year, too.
Can JD stock stay strong? I think so. China’s digital and consumer economies have long runways for growth, and JD is becoming a bigger and more important player in those economies. Improving trade relations between the U.S. and China will also help things. JD’s margins also seem positioned to keep marching higher. Thus, at this point in time, JD projects as a big revenue grower with strong upside margin drivers — and that growth profile should ultimately keep JD stock on a long term march higher.
5-Year Peak-to-Trough Drop: 82%
Recent Rally (Duration): 200% (10 months)
Social media company Snap (NYSE:SNAP) went public in early 2017 to a bunch of fanfare, and the stock spiked to $27 in just a few days. That fanfare died quickly, though, as the company’s user growth flattened out and turned negative, while the revenue growth narrative lost momentum and the company’s losses widened. From its post-IPO peak to late 2018, SNAP stock shed more 80% of its value.
Then, everything changed. It all started with an Android app revamp and a cool face swap filter, which re-ignited user growth. Re-ignited user growth led to advertisers putting more money into the app, which led to recharged revenue growth. Recharged revenue growth led to more scale, which allowed the company to leverage opex and dramatically improve the margin profile. Snap turned into a user-growth, big revenue-growth, and strong margin-expansion company in 2019, which has led to SNAP stock essentially tripling over the past 10 months.
Unfortunately, I’m not convinced that this big rally in SNAP stock can go on much longer. User growth trends are healthy, but relatively muted, and it increasingly appears that Snap will end up as a niche, direct photo-sharing app with no more than 300 million users. It also appears that the demographic will overwhelmingly remain the 16-to-24-year-old crowd, implying that the amount of ad dollars the platform can attract will be limited. Margins are improving, sure, but a lot of that improvement is because of huge stock comp — and if you exclude that comp, the margin story becomes much more bleak.
All things considered, the big rally in SNAP stock in 2019 seems slightly overdone. The stock will likely go higher, but at a much less robust rate than it has over the past 10 months.
Bed Bath & Beyond (BBBY)
5-Year Peak-to-Trough Drop: 90%
Recent Rally (Duration): 70% (2 months)
Much like Stage Stores, general merchandise retailer Bed Bath & Beyond (NASDAQ:BBBY) has been thrown into the bucket of “retailers going extinct thanks to Amazon” over the past five years. That’s because Bed Bath & Beyond is a largely undifferentiated physical retailer of products which Amazon, Walmart, and others are increasingly selling. Bed Bath & Beyond’s comps, margins, and profits have all gone in the wrong direction — and as they have, BBBY stock took a 90% tumble.
Over the past two months, however, BBBY stock has staged a huge 70% rally from its multi-year lows thanks to three things. First, the stock just got way too cheap for its own good. Second, there was a huge momentum-to-value shift that provided a lift to beaten up stocks like BBBY. Third, the company found a new CEO — and a winning pick, at that — with the former merchandise head at Target (NYSE:TGT).
Can BBBY stock keep moving higher? I think the best of the rally has already played out, but yes, the stock can grind higher from here. The fundamentals look largely maxed out, but the optics here are strong enough with the new CEO hire that you could see this stock shoot up and above the fundamentals in the near-term.
5-Year Peak-to-Trough Drop: 45%
Recent Rally (Duration): 71% (4 months)
Casual footwear brand Crocs (NYSE:CROX) has been on fire over the past five years. Long story short, the company reduced its SKU count, focused its efforts and resources on the signature clog, and turned that signature clog into a winner in the “ugly shoe” trend. This has produced renewed revenue and profit growth at Crocs, which has powered a huge gain in CROX stock over the past five years. But, that multi-year rally hit a snag in early 2019 after a bad Q1 print — and CROX stock dropped almost 50% after that print caused investors to think that the Crocs rebound was over.
It wasn’t. Second quarter numbers were much better, and the brand has only gained momentum over the past few months. In response, CROX stock has staged a huge rebound, soaring more than 70% over the past four months.
How high can CROX stock go? Not much higher. I’ve been a big bull on CROX stock for a long time. But, above $30, the stock seems fully valued. This is a mid-to-high single-digit revenue grower with solid upside margin drivers. That growth profile creates runway to $2.50 in EPS by fiscal 2025. Based on a consumer discretionary average 20-times forward earnings multiple and 10% discount rate, that means CROX stock is fairly valued at $31 by the end of 2019. We are already there today.
5-Year Peak-to-Trough Drop: 33%
Recent Rally (Duration): 83% (10 months)
Shares of general merchandise retail giant Target struggled over the past five years, dropping 33% from peak-to-trough at one point, as the company fell behind Walmart and Amazon in terms of next-gen commerce investments, and was increasingly at-risk of being left in the dust.
That didn’t happen. Instead, while Walmart and Amazon did get a head start on the next-gen commerce front, Target has come roaring back over the past two years. They’ve built out a big digital business which is now the fastest-growing online retail platform in the group. They’ve also created a robust omni-channel retail presence that is second-to-none, have doubled down on exclusive brand launches, and have expanded their product portfolio to offer more all-in-one convenience. In doing all these things, Target has increased its competitive positioning in the retail market. Comps, traffic, and profit numbers have all materially improved, and TGT stock has rattled off an 80%-plus gain to all-time-highs over the past 10 months.
What’s next for TGT stock? In the near-term, some choppiness. The stock seems fully valued up here at $110. But, in the medium to long term, more upside. This company has figured out the next-gen commerce trend, meaning that the numbers here will remain rock solid for a lot longer. Those rock solid numbers should continue to push TGT stock higher.
Author: Luke Lango
Source: Investor Place: 10 Hot Stocks Staging Huge Reversals