4 Top Stock Picks for 2021

Dec 22, 2020 07:46 PM ET
4 Top Stock Picks for 2021

In general, 2020 was a successful year for stocks. In total, the Nasdaq 100 index rose by more than 40%, while the S&P 500, Russell 2000, and Dow Jones rose by more than 10% as most constituent companies rallied.

At the same time, stocks are getting expensive. The average price-to-earnings (PE) ratio of all companies in the index rose to 36.8, the highest it has been since 2008, at the onset of the global financial crisis. Also, on a weekly chart, the four indices mentioned above rose to the overbought level. Here, we look at some of the best stock picks for 2021.

S&P 500 PE ratio

S&P 500 PE ratio

Alphabet (GOOG)

Alphabet, the parent company of Google, YouTube, Android, Verily, and Nest, always feels like an underdog despite its FAANG status. While the company’s shares rose by more than 30% in 2020, its other FAANG peers - except Facebook - rose by more than 60%. 

This underperformance was partly because of the softer advertising market as companies started to preserve cash. Also, the ongoing antitrust cases challenging the firm have pulled investors out of the stock. 

Regardless, the company is a juggernaut that owns some of the most popular businesses in the world. And as the economy recovers in 2021, we will possibly see robust spending on advertisements. In particular, the ever-important travel sector will bounce back as companies battle for market share.

Also, Alphabet will likely benefit as companies continue moving to cloud computing. While its market share remains low, the company will benefit from the overall size of the industry.

Alphabet is also a relatively cheap company. It has a forward PE ratio of 33, which is substantially lower than that of its FAANG peers like Apple and Amazon.

GOOG lagged the Nasdaq 100 in 2020

GOOG lagged the Nasdaq 100 in 2020

Alibaba (BABA)

Alibaba had an excellent year, with its stock rising by more than 22%, pushing its total market cap to more than $703 billion. This growth happened as the company’s revenue and profitability continued to increase. Indeed, in the past twelve months, the firm made more than $86 billion in revenue and more than $18 billion in profit.

In comparison, Amazon, which is valued at more than $1.6 trillion, made $17 billion in profit during this period.

BABA did well in a relatively difficult year that saw many countries shut down. Also, tensions between the United States and China continued to rise as Trump threatened to delist Chinese stocks. 

Most importantly, the much-awaited IPO of Ant Financial, a company partly owned by the company, did not happen. 

In 2021, we expect that BABA will continue to fire on all cylinders. For one, we believe that China will ultimately accept Ant to IPO. Also, we believe that the company’s marketplaces will see robust activities from international buyers.

Most importantly, the firm will continue to benefit from the overall transition to cloud computing. This is notable since BABA is one of the biggest cloud computing firms in the world.

Alibaba vs. Nasdaq 100

Alibaba vs. Nasdaq 100

Booking Holdings (BKNG)

Booking Holdings, formerly known as Priceline, is the biggest player in online hotel and flight booking companies in the world. It is valued at more than $85 billion. It owns some of the most popular websites in the industry, like Booking.com, Agoda, Kayak, OpenTable, and Priceline.com.

Booking has been among the worst-affected companies by the COVID pandemic. Furthermore, the disease drove global travel to a halt as countries implemented lockdowns. As a result, the company has only made just $8.8 billion in total revenue in TTM and a profit of just $1.3 billion. That is substantially lower than the $15 billion and $4.8 billion that it made in the previous year. As a result, the stock rose by just 2% in 2020.

We believe that the COVID-19 pandemic will not be as severe as it was in 2020 since countries have already started vaccinations. While the recovery will not be as swift, we expect that it will make strong progress, which makes Booking a top holding.

Booking is an excellent company because of the size of the brands that it owns. Also, unlike companies like TripAdvisor and Expedia, the company generates excellent margins. It has a gross margin of more than 90% and a net margin of more than 20%. 

Booking Holdings vs. Nasdaq 100

Booking Holdings vs. Nasdaq 100

Southwest Airlines (LUV)

Airlines were also among the worst-affected companies in 2020 as more countries and states announced lockdowns. When they eased their restrictions, planes were required to carry only a small number of customers, which affected their thin margins. Also, they had to invest more resources in safety procedures. Indeed, the SPDR Transportation ETF dropped by more than 10% in 2020.

We believe that the sector will bounce back in 2020. Furthermore, Congress recently passed another $700 billion stimulus package that also includes funds for the airline sector. Also, with the vaccine, we expect that more people will go back to traveling.

While betting on the airline sector is a good idea, we believe that Southwest Airlines has a lot of upside. For one, the company is in a better financial position than its peers. It has more than $14 billion in cash and short-term investments, which is a substantial firm for a company valued at more than $26 billion. It also has $12 billion in debt. 

In contrast, companies like Delta, American Airlines, and United have less cash than debt. Delta has $21 billion in cash and $28 billion in debt, while United has $13 billion in cash and $22 billion in cash. American is perhaps the most exposed with $8 billion in cash and $41 billion in debt.

Also, the company makes most of its money in the United States, which is a good thing because domestic travel will possibly pick-up faster than international travel. Also, it has used the pandemic to expand its operating routes.

Southwest vs. Nasdaq 100

Southwest vs. Nasdaq 100

Final thoughts

2021 will be a mixed year. We believe that a correction will happen at a certain point as investors rebalance their portfolios. However, we strongly believe that the four companies we have mentioned here will do well in 2021. Other firms we believe will perform well are Facebook, Eaton, Madison Square Entertainment, and Merck, among others.

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