It looks like expectations for 2019 are shaping up to be pretty dismal.
This has been a long time coming, as I have long believed that the over-optimism in the market amid rising interest rates, ever-present trade tensions and tariffs, and lofty valuations was just waiting to take the market lower.
So now that it’s happening, how should we position our portfolios for 2019?
Well, here I have two top ideas for stocks that should outperform in 2019, and get back to making investors some real money.
Bottom picking
The first idea is an energy stock that is finally seeing some strength in the last week, up 15%, Canadian Natural Resources Ltd. (TSX:CNQ)(NYSE:CNQ).
Canadian Natural is a cash machine that continues to generate strong cash flows and returns for shareholders, yet CNQ stock is down 18% year to date.
In the first nine months of 2018, Canadian Natural has seen a 50% increase in funds from operations, free cash flow after dividends of approximately $3.1 billion, and a sharp improvement in oil sands mining operating costs to $22.90 per barrel.
Adjusting to the times, management has made strategic business decisions in order to minimize the value destruction that is ongoing in this price environment, shutting-in production and reducing capital expenditures.
With a 3.61% dividend yield, a predictable and reliable stream of cash flows with little reserve replacement risk, CNQ stock remains a top pick for energy exposure into 2019.
Steady Eddie
My next idea is steady, reliable CGI Group Inc (TSX:GIB.A)(NYSE:GIB), one of the top Canadian tech stocks that offers investors both growth and stability.
CGI stock is up 25% year-to-date, as this tech stock bucks the downward trend and stands tall as others fall – testament to the company’s strength and bright future.
While there is no dividend to speak of and the stock has had times of volatility in the past, the fact is that what we have here is a global company with a global network that has diversified its revenue amongst various geographies and business segments.
Strong cash flow and earnings growth continue to accelerate as the company is firing on all cylinders.
In its latest quarter, the company reported a 16% increase in adjusted EPS, with EBIT margins of 14.8% compared to 14.4% in the same quarter last year, and a far cry from margins of below 9% years ago after their transformative Logica acquisition.
And it appears that management may be close to making another transformational acquisition that will take the company to the next level, similar to the Logica acquisition back in 2009.
In the meantime, management is shifting its free cash flow usage to share buybacks as opposed to debt reduction, which will be a positive for shareholder value.
And CGI will continue to shift its business toward higher margin business, driving cash flow and earnings growth.
Fool contributor Karen Thomas owns shares of Canadian Natural Resources, CDN NATURAL RES, and CGI GROUP INC CL A SV. CGI is a recommendation of Stock Advisor Canada.