5 Best Stocks for 2021
This has been a crazy year, and the level of uncertainty is likely to remain relatively high. President-elect Joe Biden is almost certain to shake up the government response to the Covid-19 pandemic, U.S. trade policy, and the odds for a large stimulus.
Easy monetary policy provided by the Fed and the first round of stimulus pushed investors back into the market in March, and the S&P 500 may challenge its prior highs again in the short term. From a fundamental perspective, the market looks overbought because the economic reality behind all the uncertainty is sour.
However, this has created an interesting situation where stocks with strong fundamentals and growth prospects are more likely to outperform as investors move away from more speculative trades. We have studied the fundamental characteristics that are correlated with outperformance during periods of market volatility, and they tend to boil down to just a few things:
- Are the stock’s key profitability and cash flow measures like earnings, free cash flow, operating profits and revenue trending positively year over year and on a trailing 12-month basis? Of course, this is a little more difficult to find this year, but the pandemic has also amplified some of the hidden gems in the market as well.
- Is the company turning its cash outflows into cash inflows more quickly than they did last year? This measure, called the Cash Conversion Ratio, is not reported to the public (usually) and yet is one of the best indicators of weakening demand or other problems. The best way to think about it is to ask how many days it takes after a company buys inventory or pays for services until they are able to collect payment from their customers. If the CCR was 20 days last year, but 15 days this year, it’s a great sign of hidden strength before a breakout.
- How stable is the underlying technical trend? Everyone loves stocks that trend up, but there are positive trends and then there are stable positive trends. The issue is that investors tend to dump stocks that are swinging wildly when they are uncertain, even if the overall trend is positive. Compare Fortinet’s (FTNT) trend to Microsoft (MSFT) for a good example of what we mean.
Although the pickings are getting slimmer, we still see a lot of opportunity in the market. Based on our historical back-testing, stocks that meet these criteria have outperformed the market by 42% since the financial crisis of 2009, despite the Covid-19 panic this year. That’s great news for stock traders still willing to look to buy the right kind of growth stock on the dips.
We have 5 picks to share that each qualify as a B+ to A rating on our fundamental/technical scale and have unique advantages in the current market.
Ball Corporation (BLL)
This stock is often overlooked by institutional investors because it is commonly lumped in with base metals firms like Alcoa (AA). However, BLL is actually a consumer products packaging company.
Take a minute and look in your fridge and your bathroom cabinets. Do you buy craft beers? Any spray deodorant, bug killer, or cans of pressurized shaving cream in your bathroom or hallway closets? Those packages are made by BLL, and business is booming. Consumer spending is still strong, and we think that makes this easily overlooked and undervalued stock a big winner.
We like BLL’s prospects to provide some big profits on any dips to short-term support levels.
Daily Chart of Ball Corporation (BLL) – Chart Source: TradingView
Chegg, Inc. (CHGG)
Do you have kids or grandkids in school? If so, you are already more than familiar with the frustrations around succeeding in a distance-learning environment. We have a pick that should turn that frustration into a profit opportunity.
Chegg, Inc. (CHGG) is the leader in U.S. based distance-learning companies. A cross between an online education company, social media firm and freelance consulting, Chegg has name awareness above even Amazon and Google for educational products and services among college-age adults.
Chegg’s subscription services, including live online tutoring, writing tools, homework help and textbook sales grew by 29% in 2019 and are expected to grow their gross margins by 67% in 2020. As much as we might not have welcomed the transition to distance-learning, it is likely here to stay for a while. CHGG’s volatility is right on the edge of what we find acceptable, but we think the risk/reward justifies giving them a look.
Daily Chart of Chegg, Inc. (CHGG) – Chart Source: TradingView
Our new reality of distance learning matches the new world of distance work for millions of professionals as well. This is where companies like Microsoft (MSFT) have an early edge that we think will support their growth rates through 2021.
Growth in MSFT’s Azure cloud products is still a blistering 47% on a year over year basis. And we can’t stress enough the nearly unique fact that MSFT reported its overall revenue grew by 13% and 12% in the second and third quarter this year on an annualized basis.
Daily Chart of Microsoft (MSFT) – Chart Source: TradingView
Although the individual shares are pricey, this is a classic play on growth in consumer entertainment (video games) virtual reality, artificial intelligence and since their recent acquisition of semiconductor juggernaut Arm Ltd. they are poised to dominate the hardware business.
NVDA hit a snag last year, however, our trailing 12-month numbers show the company is recovering nicely and should blow the doors off last year’s performance with topline growth of more than 15%. We believe the average analyst estimates are low because of issues with the pandemic.
As consumers spend more on home entertainment and the culture changes, we think NVDA is has huge upside potential. From a technical perspective, NVDA is a buy on any dips to support.
Daily Chart of NVIDIA (NVDA) – Chart Source: TradingView
Logitech is one of the few companies shipping its products from China that has been able to keep much of it proprietary. Although not perfect, LOGI has a unique strategy of inhouse manufacturing facilities in Suzhou, China, complimented with more industry standard outsourced manufacturing on lower margin or older products.
The advantage for LOGI right now is that they have a strong position in auxiliary gaming and online collaboration hardware. Cameras, game controllers, headphones, remotes, keyboards and mice don’t seem like high margin products, but the new rules for distance work and demand for gaming gear works in LOGI’s favor because they are so dominant in the high-end categories for those products.
However, we think the reason LOGI presents a unique value is that they have spent two years lowering expectations for cash flow growth due to the U.S./China trade wars and the Covid-19 pandemic. In the former case, we think the potential for a Biden presidency to loosen international trade tariffs, or a Trump presidency to do the same, as a way to boost the economy, is very high.
As terrible as the pandemic has been, this also works in LOGI’s favor by offsetting higher costs with increased demand – especially for enterprise-level products for video collaboration.
Daily Chart of Logitech (LOGI) – Chart Source: TradingView
The bottom line is this: We believe high levels of uncertainty have reduced the pool of attractive stocks.
However, there are still undervalued profit opportunities. Our method looks through the noise to the underlying fundamentals where stocks with room to move are easier to identify – even if the market itself is stuck in a range.