Equity Highs and Lows of 2019

Jack Ablin Market Commentary

US large caps expanded more than 30 per cent this year against a backdrop of three interest rate cuts. In a policy about-face, the Federal Reserve slashed the overnight rate to 1.75 per cent from 2.5 per cent. This change in official attitude invited investor risk taking. Technology shares soared; the S&P tech sector surged nearly 50 per cent, fueled by semiconductors. Financials rallied more than 30 per cent. US small caps and international markets also participated in the expansion thanks to US-China trade reconciliation and expectations for improved global growth.

While the markets in 2019 were driven up by lower interest rates, the investment landscape was punctuated by headlines ranging from the on-again-off-again trade talks, North Korea negotiations, yield-curve inversions or impeachment hearings. The year also saw many stock-specific high points and low points, and we focus here on some of the corporate stories that caught our attention.

Equity High Points

Apple

Apple rallied against market skepticism for most of the year. The company cut its revenue outlook for the first time in nearly two decades, citing weaker iPhone demand in China. Investors grew wary of the company’s strategy shift toward services. Ongoing trade tensions with China created an unhospitable backdrop, given the company’s reliance on the world’s second-largest economy for both supply and demand. Apple also announced the departure of its legendary Chief Design Officer, Jony Ive, over the summer. Nonetheless, the company continued to deliver stronger growth and profits, helping Apple stock surge more than 80 per cent for the year.

Tesla

2019 was a tale of two markets for Tesla. Recall that back in August 2018 Tesla CEO Elon Musk tweeted that he had secured financing to take the company private at $420/share. Months later, investors wondered whether Musk would be taken away by men in white coats, and the stock spent the first half of 2019 in a tailspin. Even though Tesla rang in 2019 at $300 per share, by May the electric automaker’s shares traded to a low of $178. The company answered back with better-than-expected sales results and securing a multi-billion-dollar financing arrangement from Chinese banks. Tesla shares accelerated faster than a Model S, by more than doubling to $420; which, incidentally, was Elon Musk’s target price in his infamous tweet.

Target

Who would have figured in this day and age that a department store could have doubled in price for the year? Yet Target defied conventional wisdom with door-busting same-store sales growth fueled by strong US consumers. Led by CEO Brian Cornell, the company reorganized to compete online by promising one-day delivery. Online sales gains also helped power the stock higher: according to CNBC, digital sales surged 31 per cent during 3Q/19, with same-day delivery options including buy online, pick up in store and curbside pickup accounting for 80 per cent of digital sales growth.  Ultimately, however, Target shares benefitted from a 50-year low in unemployment, flush paychecks and agile execution. The company capped off the year with an impressive sales beat and a brighter-than-expected outlook.

Equity Low Points

Boeing

Boeing shares suffer from a noxious blend of tragedy, bad news and unforced errors. The Chicago-based plane maker in March faced the second deadly crash of its 737 Max in five months, and witnessed regulators grounding their flagship model. The company slashed production in response. Boeing stock, having peaked at $440 last March, quickly lost altitude and leveled off at $320 by August. The company’s mission into space, which it had hoped would be a positive distraction, was aborted. Adding to its woes, the company announced the cessation of Max production, prompting its board to push the button on CEO Dennis Muilenburg’s ejector seat. Boeing stock, while up just under 5 per cent this year, trails the market by more than 25 percentage points. Investors hope the stock will climb next year under new leadership.

WeWorks

WeWorks: the company that failed to launch. Billed as a technology innovator, WeWorks is simply a real estate company. This realization didn’t play well as the unicorn attempted to go public.  Investors quickly concluded that committing to long-term leases against short-term revenues isn’t a great formula. WeWorks’ CEO and spiritual leader Adam Neumann was quickly ushered out, taking his smoke and mirrors with him, although not before he reaped a $1.6 billion exit package. One of the investment lessons learned this year: private market valuations don’t easy translate to public market valuations, as shareholders of Uber, Lyft and Peloton can attest.

Cannabis

When Canada legalized recreational marijuana in late 2018, cannabis investors were high on its prospects. Unfortunately, they didn’t consider that barriers to entry were virtually nonexistent, since, after all, marijuana is a weed that could be grown virtually anywhere. Canaccord Genuity analyst Bobby Burleson summed it up: “The big issue [is] oversupply. This last earnings season you saw companies struggling from excess supply and shortfalls in demand.”  Hmm, problems with both supply and demand. No surprise that pot stocks lost more than half their value this year.