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10 Great Stock Market Ideas For 2020

The stock market went on a tear in 2019. Major indexes hit numerous record highs in the second half of the year with the S&P 500 rising more than 29%. This puts it on track to be the best yearly return since at least 2013.

10 Great Stock Market Ideas For 2020

Morningstar identified some of the best performing fund managers, all of whom beat their benchmarks both in 2019 as well as on a longer-term basis over either a three-year, five-year or ten-year period. Below are the portfolio managers and their best ideas for the year 2020.

1. Vertex Pharmaceuticals (VRTX)

Vertex is a $56 billion market cap biotech company focused on drugs to treat cystic fibrosis. Mack sees it as an overlooked growth opportunity, “it’s overlooked because of its small addressable population—of 100,000 our so globally—in the scheme of things.” But when thinking about pharmaceuticals and drug pricing, “this is a company that is delivering value,” he says. It has taken an existing set of approved drugs on the market and added a new one: While they can reach about 56% of existing cystic fibrosis, Vertex’s new “triple combination” drug combination to treat the disease will see that number rise to around 90%, according to Mack. Although the drug is expensive and patients are on them for life, a rising life expectancy and number of treatable cases bode well for Vertex. The company is profitable, with good margins and is growing by over 25%.

2. PayPal (PYPL)

PayPal is a “household name,” but the general opportunity here is the “under penetration of digital transformation in financial services,” according to Mack. It’s a “long tail opportunity,” especially given that some 85% of the world’s transactions are still settled in cash. What’s different, he points out, is that PayPal is crucially partnering with more financial institutions and increasing its number of merchant accounts. Partnerships with Bank of America and HSBC, for example, have started to pay off as they make PayPal an option in their digital wallet offerings. Mack emphasizes that PayPal’s large user base and the scale of transactions its processes, which are both growing near 20%, is another positive. While the company is up against some other big tech players, like Apple, “there’s room for more than one winner here,” Mack says.

3. Alphabet (GOOGLE)

“Sometimes a good idea is right in front of your nose,” says Sheridan and Steinmetz. “Alphabet’s balance sheet ( with $130 billion in cash) is like Fort Knox, and the resilience and quality of the business is extraordinary.”The company has averaged near 20% growth, and its “search revenue is driven by mobile and Youtube in terms of its fastest growing segments.” With $25 billion spent on research and development per year—second in the world behind Amazon—”that’s basically Dell Labs and Xerox Park on steroids,” according to Sheridan and Steinmetz. “Google’s competitive strengths are nearly insurmountable in its core business of advertising,” they point out. The tech giant also has ambitions to move up the ladder in the burgeoning business of cloud computing, where it currently ranks behind Amazon and Microsoft.

4. Credit Acceptance (CACC)

Credit Acceptance Corp. is a subprime auto loan lender that the Sequoia fund likes to think of as “the best house in a tough neighborhood.” The company is countercyclical, as it doubled its profits during the financial crisis according to Sheridan and Steinmetz. They emphasize that Credit Acceptance doesn’t face the same set of risks as a typical subprime lender, thanks to a “portfolio program” with its dealers where it shares both the costs and payouts of loan underwriting. That means that in a downturn, Credit Acceptance will suffer less than its peers, and it can use those periods of stress to gain more market share. The company has been growing—earnings were up 22% in 2019—and it has room to continue to do so without M&A. While some bad actors in the car loan industry prey on the working poor, “Credit Acceptance Corp plays by the rules and plays fairly,” Sheridan and Steinmetz describe. “They have excellent computer systems that keep their collection agents within the bounds of what the government allows them to do.”

5. MarketAxess (MKTX)

This fintech company operates an electronic trading platform for institutional credit markets, bringing digital tools to bond trading. “What’s interesting here is that we’ve seen equity markets move to digital trading, but that's been a much harder problem to solve for bonds—as they’re generally much less liquid,” Slater points out. Digitizing these markets is a big win for asset owners because it takes out the cost aspect of intermediation that’s associated with traditional bond trading. MarketAxess has topline growth of at least 15% going into next year, accompanied by very high margins of around 50%, both of which are likely to grow in the future, Slater forecasts.

6. Yext (YEXT)

New York City’s Yext is a small-cap technology company that allows businesses to use its cloud-based network of search engines, maps and other software to boost awareness and build their brand. As more companies integrate digital components into their business strategies, Yext gives them the tools to do so, as well as share information with publishers in a way that becomes accessible to end users. An initiative for next year is a big part of that: Yext Answers, which is aimed at streamlining consumer questions about different companies or products. “While Yext is still a loss making business—and path to profitability has become the buzzword in the aftermath of WeWork—we’re happy to tolerate that if we can see the trajectory of growth going forward,” according to Slater. “We see them having a really big addressable market in the long term.”

7. Ally Financial (ALLY)

Financial service firm Ally dabbles in everything from car loans and online banking to mortgages and loans. It is a leader in auto lending, particularly in used car financing: “An area that takes some skill.” Klimo points out that “even if you think about potential disruptions like new car prices increasing, the secondhand market is still attractive.” Ally has good prospects for growth, he says, with the general consensus for the economy looking pretty good and the housing market expected to be solid. The stock has a low PE of under 8 time trailing 12 month earnings,  a 2.2% dividend yield and earnings are growing at 10% annually. Says Klimo, “What’s really remarkable is the valuation that its trading at, despite the fact that the stock is up 37% this year.”

8. Lowe’s Companies (LOW)

Klimo calls Lowe’s “a compelling self-help story” that will benefit from a strong housing market next year, supported by low interest rates. Lowe’s new CEO Marvin Ellison has improved operating efficiencies and Klimo highlights new investments in tech, like migrating systems to the cloud and improving online experience, as another boost for the company. What’s more, while “nothing is bulletproof,” and recession and housing market risks are somewhat mitigated by the cost cutting and other internal improvements, which should protect margins,” according to Klimo.

9. CoStar Group (CSGP)

A leading provider of commercial real estate data and marketplace listing services, Washington, D.C.-based CoStar has “high-caliber growth and great cash flow,” according to Scott. She highlights the company’s founder-led management team and pristine balance sheet—with no debt. CoStar’s revenue has been growing at a 20% clip and Scott expects continued innovation in new areas including a recent acquisition of Smith Travel Research, which will allow CoStar to begin expanding into data and analytics for the hospitality sector. The market usually backs off from the stock when the company announces new investment cycles, as it just has, she points out, but while this hurts near-term margins it actually sets CoStar up for its next phase of growth. The company’s expectation is that the business will have $3 billion in revenue by the end of 2023.

10. National Vision Holdings (EYE)

This $1.7 billion (sales) optical retailer sells eyeglasses, contact lenses and other products, as well as offering comprehensive eye exams. The company has seen continued growth as it serves an important medical need at good value, according to Scott. “It’s a compelling story in that it has a unique position as a growth retailer outside of e-commerce,” she points out. As the company brings in more customers and gains market share, comparable store sales have increased. Overall revenue is growing by just over 10%, and the company continues to deleverage, Scott says. While risks include tariff headwinds and concerns that Walmart may not renew a strategic partnership to operate its Vision Centers, she believes that these are priced into the stock. The company is also starting to leverage its new investments in areas like cybersecurity and laboratories for making eyewear.


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