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Market Predictions for 2019

Chris Hill, The Motley Fool

In today's episode of MarketFoolery, host Chris Hill talks with the Fool's chief investment officer, Andy Cross, about which stocks, sectors, and CEOs to watch in 2019, plus some reckless predictions. When will bank stocks recover from a rough 2018? Will Facebook (NASDAQ: FB) bury its troubles in the next year? Will COO Sheryl Sandberg be at the company to see it? Ulta's (NASDAQ: ULTA) CEO isn't getting nearly enough love from the market, while General Electric's (NYSE: GE) CEO has an interesting battle ahead of him. Will Ireland take home the Rugby World 2019? Listen and find out more. For more predictions like this, check out last week's episode of Motley Fool Money.

A full transcript follows the video.

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This video was recorded on Jan. 8, 2019.

Chris Hill: It's Tuesday, January 8th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, it's the chief investment officer Andy Cross.

Andy Cross: Chris Hill!

Hill: Thanks for being here, man!

Cross: Thanks for having me, man!

Hill: For those who listened to last week's Motley Fool Money show, we did our preview of 2019. You were scheduled to be on that show. Circumstances prevented that. I wanted to get you on today to give your take on how you're looking ahead to 2019. Let's start with what you're watching in terms of trends. 

Cross: Thanks for having me for that! That was nice! I'm sorry I missed that show. I'm glad to have a chance to talk a little bit. Obviously, investing is all about the future. When you put cash to work, you're hoping for a return on that. What's interesting with me this year is, with the Fed raising rates so aggressively over the past year, there's lots of talk about what's going to happen in the future. I'm actually one of those who think that we will see maybe one more increase. If we see two or more, I think that would be a little bit of a surprise. But what's interesting for me from that perspective is, I think financials actually have an opportunity to rebound from a pretty lackadaisical 2018, looking at 2019.

The Fed has been raising rates, which has been good in some ways for the financials and the larger banks that basically performed about the size of the market. I think companies like JPMorgan, Markel, some of the financials that are reliant on interest rates, a steady economy, a little bit of a Goldilocks kind of moment here. Financials could have a have a return in 2019.

Hill: We talk about the big banks every now and then. If you're someone like me, who does not own shares of any of the big banks, it's probably easy to sit back and think, "They're doing fine. I'm not worried about Goldman Sachs. They're doing fine." But you look at the performance over the past year for, as you mentioned, JPMorgan Chase, Goldman Sachs, 2018 was not a good year.

Cross: It wasn't. That actually surprised me. I thought they would have a better year last year. Wells Fargo continues to have some struggles there. They're such large enterprises that it's hard to turn on a dime. 

I mentioned those two. On the smaller side, one that we follow in one of our small-cap services, Butterfield Bank out of Bermuda. It's a much smaller bank. It's only a about $1 billion in market cap. They're the dominant player in the Bermuda area when it comes to deposits. The stock had done very well, but then it got walloped after they came out with some weaker guidance after an acquisition they made of some trust business. That really has hurt some of the expectations. I see that as a buying opportunity for this bank that I think, over the next five years, will do pretty well in this kind of environment. 

Hill: Aside from financials, in terms of individual stocks, what do you have your eyes on in 2019?

Cross: Thanks, Chris, for that. One that I think is set up to do well on a much larger size is Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG), the Google parent business. When you think about all that they are in, and where they're taking that business. Obviously, search and online advertising continues to be the huge driver, but they're involved in so many other investments they're making. It's a $750 billion business. They have about $100 billion in cash. They're making all kinds of investments. Their YouTube business continues to grow. I think it's probably more profitable than what we're seeing. Online advertising will continue to evolve and grow. 

Obviously, a company that size has some struggles when it comes to regulatory concerns. The online advertising market, while it's evolving, is under some pressure, as we saw with the likes of Facebook, when it comes to privacy issues and what that might mean for the online advertising business. But I just like what's going on at Alphabet, with the way that they've structured that business with Google and the other businesses and investments they're making in other businesses. And, the stock is really not that expensive. It's one that I like now.

On the financials side, piggybacking back there, a non-bank that I like is MarketAxess (NASDAQ: MKTX), which operates the largest online bond trading platform.

Hill: Wow, that sounds sexy! [laughs] Sorry!

Cross: They're basically trying to democratize and open up bond trading much like you've seen with platforms and discount brokerages on the stock side. It's much more complex, much more done old school through phones or text messages or emails when you're trying to match up buyers and sellers of corporate bonds, sovereign bonds, and lots of other fixed instrument investments. They're the market leader. They have the largest market share when it comes to online bond trading. That's a growing market. They're led by their founder and CEO, who's the largest individual share owner, Richard McVey. 

It's extremely profitable. Returns on capital are exceptional. They're growing. I expect that market to continue to evolve and improve over the next few years. So, MarketAxess is one stock that I like this year and beyond. 

Hill: To go back to Alphabet for a second, obviously the FAANG stocks have dominated media coverage for so long. It's interesting to see, with the pullback that we saw over the last couple of months, a company like Amazon. The focus is on, "They're down from their highs." Well, they are. But over the past 12 months, it's a stock that's still up about 30%. Whereas, in the case of Alphabet, Alphabet is basically flat from a year ago.

Cross: Yeah. The stock has basically trodden water. That's one reason why it sells somewhere in the 15-18X earnings, when you think about the amount of cash flow they generate and where they can put those investments into now. They have to make money on those investments over the long-term. I think they will. Again, it's a very large company. It's widely owned. But I think that's a business that you can own and be comfortable with looking at the next few years, regardless of what's going to happen to the stock market in the short-term.

Hill: Who were the CEOs you're watching?

Cross: It seems like we talk about General Electric a lot on the show, but Lawrence Culp, the new CEO at General Electric, is one that I'm really interested to watch. They've gone through various CEOs over the last year. A little bit of a surprise when the last CEO was kicked out after some of the initiatives that he was making. We've talked about this on the show. Larry Culp comes from Danaher (NYSE: DHR) here in D.C. That's a fabulous operator. He ran that organization for more than 10 years and did really well. He stepped down just to take some time away.

It'll be very interesting to see how he takes the reins at General Electric. They're spinning off their digital business, they announced. I'm really interested to see. This is a legendary business that has so struggled. At $70 billion, it's a company that's fallen from grace. Someone with the talents of Larry Culp, to get the operating units going, their strength, I'm interested to see if he can actually deliver on that.

Hill: A year ago at this time, one of the people we talked about was John Flannery, who at the time was the CEO of General Electric. I, among others, was praising Flannery for how clear he was being with Wall Street. He was so open about, "This is what we're doing. There are no sacred cows at this company. Everything is on the table." And now, as you were talking, I thought to myself, "As clear as he was communicating with Wall Street and with analysts, I wonder if, in hindsight, he maybe should have done a little bit better job hand-holding the board of directors." They couldn't fault him for being opaque. He was very clear. "This is what I'm going to do." I was surprised when he got cut loose in the middle of the year.

Cross: We looked at General Electric earlier. On one of our services, we shorted it a little bit when the stock was around $15. Now, it's around $8. When you think about the challenge that Flannery had in front of him, and the way that he was going about that, I thought, "This is a guy who has lots of success inside the General Electric family, who could get this ship going in the right direction, making the changes that people have been talking about for a while." It just seems, like you said, the board wasn't behind that. And at some point, when the last straw hit the camel's back, the board just didn't seem to be aligned with where Flannery was taking the business or talking about taking the business. They thought that was just a little bit too much for General Electric. And they went toward Larry Culp, who's pretty new to the General Electric business. 

Hill: I'm glad you used the phrase "the GE family" in reference to John Flannery, because that's something to be noted about Larry Culp. This is a guy coming from outside the company. It's not to say that's either good or bad, but it is notable. I think it's going to be very interesting to see what Culp does.

Cross: General Electric for years and years has talked about their management discipline, going all the way back to Jack Welch, grooming these great managers. I think we've seen over the last 10 years, that may not really be the best way to characterize that, when you think about the long-term. Or, maybe the business was just so dramatic and so big that it's hard to turn, especially with the disaster the Financial business turned out to be.

Larry Culp comes from Danaher, where they have their Danaher business system. That's an operating philosophy that's worked well for Danaher when it comes to acquiring businesses, turning them into profit machines, reallocating that capital. If that's the way that General Electric is going to go, and focusing on their core businesses, that might be the way to get General Electric out of this deep rabbit hole that it's in right now.

Hill: If Larry Culp is not on the hot seat, let's just say it's a little warmer than the average CEO's. Are there other CEOs that you look at and you think, "I'm keeping my eye on them, I think they're poised for a great year."

Cross: The likes of a Larry Culp and Elon Musk, we love talking about those in the media as they're struggling. But there are definitely CEOs out there that are doing so well just from a day-to-day, continue to grow that business. Mary Dillon at Ulta is one of those. She's proven to be an exceptional CEO of that retailer of cosmetics. The way that they add to their stores, renovate stores tactically, will shift their real estate. How they have pushed the online business to be a bigger driver, how they have used their membership rewards now to be able to drive so much more value on a per-member basis, and make use of a footprint at a big box retailer that's fairly large. In the face of the likes of Amazon and other retailers that are continuing to hunt at Ulta, they have been able to continue to grow and grow pretty nicely. It's exceptionally profitable for a retailer. And, they use that capital very well and have very high returns on that capital. Every dollar they're investing back in the business continues to become more and more valuable. Mary Dillon does get some respect, but she's not a household name, and she should be.

Hill: Particularly when you consider that, for the stretch of time that she's been in the corner office, you mentioned the salon business, Ulta was doing very well in that. I'm sure there were at least a couple of people in her lieutenants who were like, "No, let's keep going here." The decision to really push the online business was a smart one. This was not a business that needed turnaround. This was a successful business. And she was not in any way satisfied with that. She said, "No, we can be doing more to grow this business."

Cross: That's very apropos, when you say she was not satisfied. When she came in, she had the membership media experience from her previous roles. She brought that, infused that into Ulta, used that as a new focal point for them to be able to grow their sales per square foot from focusing on the more profitable members tied to their membership business and using that as a catalyst to drive the online business, as well. They've mastered that. In some ways, that omni-channel presence has been able to keep the cosmetics competition and retail competition at bay. And, they've also been able to strike up really great partnerships with exclusive brands like Kylie Jenner, as well. That's been another way to keep Ulta front and center when it comes to their members when they want to use, test, and buy cosmetics.

Hill: Before we get out of here, give me one reckless prediction for 2019. 

Cross: We talked a little bit about the FAANGs. I mentioned Facebook. I think Facebook ends up profitable for the year. Reckless prediction here, of course. Not investing in Facebook. I own shares, not investing just for one year, bought the stock around $140. Really hit some struggles. We've talked a lot about them over the year on the show here and written a lot about them. I think that stock rebounds a little bit in 2019, continuing to figure out how to better solve the challenges they're having. I think they're not done. They have some work to go. Also, from a reckless prediction side, I would be surprised if Sheryl Sandberg is not there by the end of the year. 

Hill: I think you buried the lede. [laughs] That's the more surprising thing.

Cross: Could be. It's not my stronger reckless prediction of the two. I think Facebook sees a little bit of a rebound. I think they get some things right. They've hit these struggles and had some culture clashes internally. That's been a struggle. I think they get that worked out this year.

Can I go with a non-financial, non-stock reckless prediction for you, Chris?

Hill: Absolutely!

Cross: I think Ireland wins the World Cup of rugby played in Japan this fall. They take down the All Blacks in New Zealand. They had a great 2018. I think they have a shot to dethrone the All Blacks in New Zealand at the Rugby World Cup held in Japan this fall. 

Hill: I would love to see that. I can also think of a couple of listeners that we have in New Zealand who are very angry right now.

Cross: Listen, they're a phenomenal team! They're like the Patriots. This is why it's reckless. Last year was great for them in rugby.

Hill: In the wake of last night's college championship game, I thought we were going to make a prediction about the University of Michigan.

Cross: [laughs] I went there, man. I don't know if Harbaugh's there by the end of the year. I don't know that. But I was not ready to make that prediction. Listen, my wife, with Urban Meyer leaving OSU, she said, "Hey, maybe you have a shot to actually beat Ohio State this year." I was going to make that my reckless prediction, but I didn't go there.

Hill: Somewhere, there's an offshore betting outlet that has a pairs bet that they've just created. It's basically, who lasts longer in 2019 in their current place of employment: Jim Harbaugh or Sheryl Sandberg. 

Cross: True!

Hill: Let's bring in our man behind the glass, Dan Boyd. Dan?

Dan Boyd: Andy, I love your enthusiasm about the Irish rugby team, but I just want to say, I don't think it's a reckless prediction to predict that the winner of the Six Nations Cup in 2018 is going to win the Rugby World in 2019. I don't consider that reckless. 

Cross: I don't know, I think the gap between New Zealand and the rest of the world is still pretty high. I'll disagree with you on that. But thanks for the call!

Boyd: That's like saying, "The No. 1 and No. 2 teams are playing in the Super Bowl. I think the No. 2 team is going to win." Real reckless, Andy!

Cross: I don't know, man! Nobody thought the Eagles were going to win the Super Bowl last year! 

Hill: There you go. Although, I will point out, Dan does have experience as a college rugger.

Cross: He may know better than me. I'm just excited to see if they can take down the All Blacks.

Hill: We'll wrap up there. Andy Cross, thanks for being here!

Cross: Thanks, Chris!

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Andy Cross owns shares of Facebook and MarketAxess Holdings. Chris Hill owns shares of Amazon. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Facebook, and Markel. The Motley Fool owns shares of Bank of N.T. Butterfield & Son and MarketAxess Holdings. The Motley Fool recommends Ulta Beauty. The Motley Fool has a disclosure policy.