Investors Can't Stop Obsessing About Apple, Netflix and Nike. Here's What's in Store for Their Stocks in 2019
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"A wise investor once remarked to us: ‘If Jesus were a stock, he’d be Netflix.’ ” That’s how Bernstein media analyst Todd Juenger recently summed up the fervor surrounding the revolutionary streaming service—which, he was quick to add, had attracted obsessive detractors as well as fans.
As it happens, something similar could be said of any number of superstar stocks, whether they’ve gained cult status because of customers’ fierce loyalty, a demigod-like chief executive, or a seemingly impenetrable competitive moat. When Juenger made that comment in 2017, Netflix traded around $140 a share—and fans would have doubled their money within a year.
Yet cult status often carries additional risks, like higher valuations and extra scrutiny from investors, consumers, journalists, and politicians. Look at Apple. As recently as August, it was being toasted as the first trillion-dollar company. Since then, worries about slowing sales growth have knocked nearly $200 billion off its market value.
Of course, the greatest risk in owning a cult stock is letting your own feelings about a brand or its iconic leader get in the way of rational investment decisions. “You can fall in love with a stock,” says Kevin Landis, chief investment officer of Firsthand Capital Management in San Jose. “And then you get your heart broken.”
Here’s the outlook for six of the market’s most-obsessed-over stocks.
DON’T BET AGAINST BUFFETT
Stock price: $203 (B shares)
Market capitalization: $501 billion
Trailing P/E: 8.1
YTD return: 2.2%
With core holdings that include BNSF Railway, Geico, and Fruit of the Loom, Berkshire Hathaway isn’t a sexy company by any stretch. Yet every spring more than 40,000 people convene in Omaha just to breathe the same air as Berkshire’s chairman and CEO, Warren Buffett.
Can you blame them? Since 1965, when Buffett bought the then--failing textile company, Berkshire has churned out a compound annual growth rate of more than 19%, according to its 2018 shareholder letter—more than double the return of the S&P 500. The stock’s A shares recently traded around $305,000, but mere mortals can pick up B shares for $203; there is virtually no difference.
“I’m part of the tribe,” says Ed Walczak, a portfolio manager with Vontobel Asset Management, a New York investment firm. He attended his first meeting 25 years ago and hasn’t missed a single one since. Buffett “has become less accessible,” he says, “but investors still go out there because we are reminded once a year of how we should invest.”
Although Buffett’s approach is vanilla value investing, his uncanny ability to be “greedy when others are fearful” warrants the cult following. In addition to Berkshire’s diverse collection of majority-owned subsidiaries, it manages a $200 billion stock portfolio that includes Apple, Bank of America, and Coca-Cola, among others.
Walczak doesn’t think the company can continue to average high double-digit returns—largely because of its size—but he believes the stock still has plenty of value, particularly if market volatility continues. “I would expect this to be a defensive stock that will offer reasonable rates of return,” he says, adding that the company’s board recently loosened restrictions on buying back stock, suggesting that Buffett thinks Berkshire stock is undervalued. Indeed, in the most recent quarter—when operating profit nearly doubled from the year prior—the company repurchased more than $900 million of its stock, the first such move since 2012.
Meanwhile, by many estimates, Berkshire stock is a relative bargain. Based on Buffett’s own favorite financial measure, “look-through earnings,” Berkshire shares are cheaper than they appear, notes J.P. Morgan analyst Sarah DeWitt, who projects a 50% jump in earnings in 2019, after incorporating profits of companies in Berkshire’s stock portfolio.
Of course, this also raises the question of how much Berkshire’s value is linked to its 88-year-old chief. A successor has yet to be named, but Walczak and others believe that if Buffett is as meticulous about managing his exit as he is his portfolio, Berkshire can continue to add value long after the Oracle has departed.
RIPE FOR THE PICKING
Stock price: $172
Market capitalization: $814 billion
Trailing P/E: 14
YTD return: 1.6%
It never seems to get old. Whenever Apple releases its newest iPhone, customers around the world line up, in many cases for hours, to be among the first to own it. Reporters cover the ritual, and investors analyze store traffic, social media chatter, and other metrics, hoping to understand how such releases will impact sales. But this is just part of the story.
“Apple has an ecosystem of devices that become hard to move away from because they have so penetrated people’s lives,” says Eric Schoenstein, comanager of the $5 billion Jensen Quality Growth Fund.
Apple devices, be they smartphones, watches, tablets, or laptops, are increasingly a conduit for what could ultimately be the real moneymaker for the behemoth: services.
The company’s services segment represents just 15% of its revenue, but that component is extremely profitable, and it’s growing. In the third quarter of 2018 such services as the App Store, Apple-Care, Apple Pay, and iTunes generated $9.5 billion, a 31% increase from the year prior and easily on track to reach CEO Tim Cook’s goal of $14 billion by 2020—which is just $1 billion shy of Netflix’s total revenue for 2018.
There’s another plus: Not only do services offer a steady drip of recurring revenue, they also create a virtuous circle for the company: More services lead to more device sales, which lead to more services.
“This is creating even more stickiness in their customer base,” says Schoenstein, who first bought Apple in 2016 after it reached a required milestone for his fund, a 15% return on equity for 10 consecutive years. Apple’s ROE is now more than twice that. Meanwhile, the stock looks to be a bargain, especially after investors -- reacting to a slightly below-expectations sales forecast -- sent shares tumbling more than 20% since the start of November. At about $172 a share, the stock was recently trading at around 13 times forward earnings estimates, far less than the average stock in the S&P 500.
Stock price: $275
Market capitalization: $121 billion
Trailing P/E: 96
YTD return: 43%
When Netflix began offering mail-order DVD rentals in 1998, few people could have predicted that the company would popularize the idea of “binge watching,” unravel the cable media model, produce award-winning series—and, at one point, overtake Walt Disney as the most valuable media company on the planet; Disney has since reclaimed that position.
“They are the best company in the world, poised to capitalize on this really powerful trend of cord cutting,” says Landis, who added the stock to his Firsthand Technology Opportunities Fund in 2003 and has owned it since, though he has routinely trimmed the position, much to his distress. “Every time I’ve dropped a sale ticket on Netflix I’ve regretted it,” he says, laughing. Indeed, a $1,000 investment in the stock in February 2003 would be worth about $286,000 today.
Yet the stock isn’t without its skeptics, and understandably. Despite its mind-boggling 137 million subscribers worldwide—it added 7 million in the last quarter alone, with most of that growth coming from overseas—the company is still losing money, to the tune of $3 billion in 2018. But that’s because Netflix is spending billions of dollars a year to add to its growing library of shows and movies. As long as the company has access to capital, Landis says, its spending isn’t an issue. Meanwhile, more content means more loyal subscribers.
High valuations are also a big reason the haters hate. The stock is trading at 66 times next year’s earnings, more than triple that of the S&P 500. “You can go back five, 10, 15 years, and the arguments against it are essentially the same,” Landis says, noting that Netflix’s revenue growth, which has averaged more than 22% over the past five years, has more than justified its valuations. “These guys have been dying from the same heart attack for the last 20 years,” he adds, borrowing from Michael Corleone in The Godfather: Part II—and, yes, that movie is available on Netflix.
AT THE RIGHT PRICE
Stock price: $73
Market capitalization: $117 billion
Trailing P/E: 59
YTD return: 21%
Nike has faced some challenges lately—from a crowded “athleisure” market to allegations of sexual discrimination at company headquarters—but several factors could lead the sportswear juggernaut to a clutch performance in 2019. While the stock may not have a cult following, the brand certainly does.
The swoosh is one of the most recognized logos in the world. It has long been associated with a who’s who of sports and is currently a favorite in the lucrative and influential teen market. Meanwhile, Nike has a huge lead over its rivals, with 34% market share for global athletic footwear, according to Sporting Goods Intelligence, or twice that of its competitor, Adidas, the second-largest in the field.
“It has many entrenched competitive advantages that are hard to shake,” says Jensen’s Schoenstein.
For investors wondering if they should just do it, there are still other reasons for taking a closer look at Nike. In recent years the company has streamlined manufacturing, reduced its design-to-market cycle, and, perhaps most important, focused on selling directly to consumers. In the 2018 fiscal year more than 30% of Nike sales in North America cut out retailer middlemen, and the company is taking more steps to expand its own stores and digital reach.
Taking out the middlemen not only pumps up the profit margins, it also gives Nike a closer look at what customers are wearing and buying, Schoenstein notes. That connection translates to more customer loyalty and better insight into the tastes and trends they care about. Putting it all together, Oppenheimer analyst Brian Nagel relaunched coverage of Nike in mid-October with a 12-month price target of $90 a share.
STREAMING COULD BRING BACK THE MAGIC
Stock price: $113
Market capitalization: $168 billion
Trailing P/E: 14
YTD return: 6%
The same trends that are driving up Netflix have been a drag for Walt Disney—the stock has languished over concerns that cord cutting would hurt its ESPN empire, American Broadcasting Co. (ABC), and other networks. Shares have yet to surpass their 2015 high.
Some investors think Disney may be worth a second look, especially if its new streaming service, slated for late 2019, proves a hit. While Netflix is investing heavily to bolster its catalog of content, consider what Walt Disney already has: In addition to all those Disney movies—and trademarked characters—the company owns Marvel Studios, Star Wars creator Lucasfilm, and, soon, 21st Century Fox, an acquisition in the final stages of regulatory approval.
Still, many investors are taking a wait-and-see approach, as it likely won’t be as easy as bibbidi-bobbidi-boo. “Nothing against Disney, but a big company with lots of pots boiling can have a harder time competing against a more focused company like Netflix,” says Landis.
Nevertheless, the 95-year-old Disney has a long track record for managing many different assets in a wide range of categories. “Disney is all about content,” says Vontobel’s Walczak, who owns Disney stock. “You’ve got good management, and people still go to the theme parks.”
Indeed, the company’s parks and resorts account for roughly a third of Disney’s nearly $58 billion in annual revenue, a healthy increase over the $55 billion it has posted the past couple of years. Considering that Disney has managed to raise prices and attract more visitors to its six major theme parks, cruise line, and other resort properties, maybe it hasn’t lost its magic touch.
TIME TO PARK IT
Stock price: $35
Market capitalization: $5.7 billion
Trailing P/E: 11
YTD return: –14.7%
Not sure whether Harley-Davidson deserves cult status? Search images of Harley tattoos. Better yet, head to South Dakota during the 78-year-old Sturgis Motorcycle Rally, and hear the roar of hundreds of thousands of motorcycles, most of them Harleys.
But while the brand still has a loyal following, the company has hit some rumble strips. The stock, which trades around $35 a share, has yet to surpass its all-time high of nearly $70 in January 2007. Even value managers can’t bring themselves to get on the back of Harley.
First, there are the issues of tariffs, which spell trouble for the quintessential American company, notes Edward Jones analyst Robin Diedrich. It’s grappling with higher costs on steel and other materials it imports as well as a backlash for moving some of its production overseas in an effort to minimize the impact.
Trade wars are only part of the problem. Perhaps the biggest headwind the Milwaukee company faces is demographics. Its core customers, baby boomers, are getting up in age, and the next big generation of consumers, millennials, are more inclined to ride Vespas or just order an Uber.
The company has tried a number of initiatives to keep the rubber on the road, including launching lower-priced, sportier models. Of course this could be risky if it flies in the face of Harley’s image. Bottom line: Shares are trading around 10 times forward earnings estimates, which is below its historical multiple of 15. But the combination of increased costs and slowing demand suggests that investors should not jump on.