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2019 Predictions from CFRA Research's The Outlook

With 2018 at a close, we highlight an economy that measured by any metric is rolling along nicely, thanks in part to a tax bill signed early in the year. We also note a year of wild and volatile swings in the markets, ongoing tariff and trade-war gamesmanship and Brexit in full disarray. Where are we headed in 2019? Here are select predictions from CFRA Research equity analysts in the annual forecast issue of our research newsletter, The Outlook.

Angelo Zino

We project the smartphone industry to witness unit shipments that are flat to slightly down in 2019.This would follow our expectation for a 1% decline in 2018, as we think the declining units primarily reflects the ongoing trend of consumers holding onto their phones longer.

See also: Top Picks 2019: Apollo Global Management, LLC (APO)

Wearables shipments growth will likely be 10% to 15% in 2019, by our estimates. We expect demand to be driven by the ongoing adoption of untethered devices into the market, a shift towards health care offerings and ongoing improvements in the underlying sensors. We also see greater adoption in general, as most consumers remain unaware about the prospects for wearables.

Our top recommended hardware stocks, which we see outperforming major market indices in 2019 are Apple (AAPL) and Fitbit (FIT).

Despite uncertainties surrounding unit shipments from Apple’s iPhone business, we think the company will continue to benefit from the shift to higher priced devices, release of new product offerings and, most importantly, robust growth within the services business.

Fitbit is our top speculative pick as we forecast the company will benefit from the ongoing shift towards higherpriced smart wearables, expansion into new product categories, and the potential to return to sustainable profitability in the second half of 2018. We note Fitbit’s strong brand as well as a healthy balance sheet, making it a viable takeover candidate.

Ken Leon

We do not see a housing crash even with home pricing near or above the 2006 peak levels. The housing market has low inventory, fewer speculative new homes in homebuilding communities, low household debt and a conservative lending environment from the U.S. banking industry. The S&P CoreLogic Case-Shiller Indices continues to show near 5.0% to 5.5% price gains as evidenced by the September 2018

Home Depot (HD) and Lowe’s (LOW) stand to be direct beneficiaries of U.S. housing trends. Annual sales for U.S. home improvement retailers have grown by nearly 41% from $265.2 billion at the bottom of the Great Recession to $373.6 billion at year-end 2017.

See also: Top Picks 2019: TPI Composites (TPIC)

The Home Improvement Research Institute (HIRI) estimates total annual sales of home improvement retailers to be $391.2 billion, up 4.7% at year-end 2018 and $409.2 billion, up 4.6%, at the end of 2019. HIRI has done studies of the major life stages of households that indicates Millennials and Generation X groups are completing more projects than their older counterparts. Most common house projects are painting, new appliances, bathroom and kitchen remodeling.

The rise of new smart home systems should boost home improvement spending. Home improvement retailers like Home Depot and Lowe’s should benefit from consumers buying smart systems or embedded smart home features in a thermostat, refrigerator or alarm systems.

Home monitoring and security would be devices for, among other things, connected door locks, cameras, moisture sensors near furnaces or humidifiers and door bells.

Another area of new market opportunity is connected lighting in a smart home solution. We think integrating varied smart devices to a central hub for home interoperability ties into home improvement with sales experts and installation services available to customers

Scott Kessler

In the consumer discretionary sector, we see continuing healthy revenue growth for Alibaba (BABA) in FY 19 and FY 20, even  though the company modestly reduced its current year outlook last month, given Chinese economic uncertainties. We note efforts to expand outside China as well as gains led by e-commerce and cloud computing.

We see a 2019 recovery for the S&P 500’s Home Entertainment stocks — Activision Blizzard (ATVI), Electronic Arts (EA) and Take-Two Interactive (TTWO) — reflecting positive shifts to digital and mobile, and new game introductions from late 2018 well into 2019. Those stocks fell 27%, 25% and 9.1% YTD through December 7 (vs. the S&P 500’s small drop of 1.0%).

We point to Call of Duty: Black Ops 4 (Activision Blizzard) and Red Dead Redemption 2 (Take-Two) in the fall of 2018 as well as Anthem (Electronic Arts) and Jedi: Fallen Order (Electronic Arts) in 2019.

We expect Facebook (FB) to remain the focus of considerable scrutiny from and criticism by governments and regulators around the world. Although we expect related domestic legislation to be proposed and maybe even passed, we don’t see major 2019 changes to U.S. law negatively impacting the company in a material way.

We’ve been expecting Alphabet (GOOGL) and Facebook to release more information about YouTube and Instagram. We think 2019 will be the year Alphabet provides more details about YouTube. In particular, we would like to see revenues, EBITDA and earnings.

Tuna Amobi

Amazon (AMZN) will become further entrenched as the premier U.S. e-commerce destination amid continued strong growth in its Prime membership. 2019 will mark a tipping point as Amazon likely surpasses half of U.S. ecommerce sales, and Its Prime membership base should mark another major milestone in 2019, after reaching 100 million earlier in 2018.

Netflix (NFLX) will attain a solid run rate of at least 23 million net additions of international streaming subscribers. It should comfortably surpass 100 million of paid streaming subscribers in international markets, more than tripling over the four years since the company completed its full global launch in early 2016.

Comcast (CMCS.A) and/or AT&T’s (T) Warner Media will take steps to exit their minority stakes in Hulu. Disney (DIS) will then further consolidate its majority control of Hulu as a key component of its direct-to-consumer strategy — ahead of a 2019 second-half launch of its branded direct-to-consumer offerings.

Camilla Yanushevsky

We expect retail sales to increase 4% in 2019. In August, the National Retail Federation lifted its 2018 retail sales growth forecast (excluding automobiles, gasoline stations and restaurants) to at least 4.5%, from 3.8% to 4.4%, citing gains in disposable income and record-high household worth (in line with our previous forecast of 5%). We expect interest rate hikes to modestly reduce disposable income and slightly pressure retail sales growth to 4% in 2019.

We think GameStop (GME) will be bought out. The specialty retailer confirmed on June 19 that it was in preliminary negotiations with unnamed third parties regarding a potential transaction. The sale of Spring Mobile for $700 million will likely free up resources to reduce GME’s outstanding debt and increases its allure as an LBO candidate.

Garrett Nelson

We think U.S. automotive equities will post better performance in 2019. Underpinning this forecast is the fact that many of the concerns that have weighed so heavily on the group have recently been resolved, which we think sets the stage for a relief rally in 2019. Stock selection will be paramount, and we prefer names with secular growth trends that are largely independent of the macroeconomic backdrop -- such as Tesla (TSLA).

We predict TSLA’s Model 3 will become the bestselling U.S. passenger car by the end of 2019. In Q3, we predict that monthly Model 3 sales will surpass the Toyota (TM) Camry, Honda (HMC) Civic, Toyota Corolla and Honda Accord (which currently rank #1-4, respectively, in total U.S. sales), as deliveries ramp and sales of the top four vehicles continue to decline.

While admittedly a longshot prediction and a combination that has been speculated for years, we think there is a remote possibility Apple will buy Tesla in 2019. While the acquisition would be highly uncharacteristic for Apple, which has historically avoided large deals (largest-ever acquisition was the $3 billion Beats purchase in 2014), we think the company may be entering a phase where it needs to make a bold move given saturation in the smartphone industry and a need to diversify its portfolio (over 60% of revenue is from iPhones).

Stuart Glickman and Paige Marcus

WTI crude oil prices will recover from 2018 post-Iran sanctions, but fall short of 2018 pre-Iran sanctions. Based on estimates from PIRA Energy, we see WTI averaging $62/barrel in 2019, above recent levels, but below the pre-sanctions level.

Refiners will enjoy the largest EPS gains of any Energy sub-industry in 2019. Among the four major U.S. refiners in our coverage, we see Valero (VLO) earnings up 48% in 2019, followed by HollyFrontier (HFC) (+24%), and Phillips 66 (PSX) (up 8%, but PSX has a bigger midstream presence along with its refining operations).

The fourth refiner, Marathon Petroleum (MPC), will see EPS growth of 47%, driven in part by its late 2018 accretive acquisition of the former Andeavor.

The Bakken Shale will overtake the Eagle Ford Shale for the #2 shale oil producer behind the kingpin Permian Basin. The U.S. Energy Information Administration (EIA) notes that November 2018 crude oil volume from the Bakken Shale in North Dakota (1.36 mmb/d) is slightly behind that of South Texas’ Eagle Ford Shale’s 1.42 mmb/d, although a far cry from West Texas’ Permian Basin (3.63 mmb/d). This could benefit large Bakken producers such as Continental Resources (CLR) and Hess Corporation (HES).

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