In 2020 the COVID-19 pandemic and economic turmoil resulted in very mixed returns for stock markets around the world. While sectors like technology and consumer discretionary were strong, the energy sector within the S&P500 index was down more than 30%. The result is that while some sectors are trading at extreme valuations, others appear cheap. So, which are the stocks to watch in 2021?
In this post we highlight 12 stocks to keep an eye on over the course of 2021. These stocks are all in different industries and while some are growth stocks, others are more defensive picks.
- Market outlook for 2021
- Positioning your portfolio for 2021
- 12 Stocks from prominent industries for 2021
Market outlook for 2021
Forecasting market returns is never easy, and 2021 is no exception. The following factors could point to a bullish market environment:
- The digital economy continues to grow rapidly.
- As COVID-19 vaccines are rolled out, the pandemic should begin to end, and economies can return to normal.
- Incoming US President Joe Biden is keen to provide more fiscal stimulus to reignite the economy.
- Some sectors are very reasonably valued.
On the other hand, the following factors suggest there are risks:
- The global technology sector which has led the market for the past decade is arguably in bubble territory.
- Britain’s exit from the EU has now been finalised, but the full implications for UK and European companies and economies is now going to become clear.
- Investors are nervous about some of the policies Joe Biden may introduce. His first 100 days in office may also create uncertainty for some sectors – as well as for issues like the US-China trade war.
With a newly elected administration, the US will be the centre of attention for now. The immediate outlook for Europe and Asia is a little uncertain, and it may be better to wait for the new US agenda to be outlined in more detail.
Positioning your portfolio for 2021
Given the current environment, investors should adopt a balanced approach without assuming any one outcome will prevail. As always, the safest way to invest is by diversifying across industries, sectors and asset classes. As is usually the case, several analysts are predicting a market crash in 2021.
These predictions are typically of little value, but you can always reduce portfolio risk by holding assts like hedge funds, gold and bonds. Generating steady returns over time requires a mix of growth stocks and other safer stocks. And, when growth stocks are expensive, as they are now, it is important to stick to the highest quality, market leading stocks in each industry.
12 Stocks from prominent industries for 2021
The following 12 stocks are from 12 prominent industries. Included are six growth stocks, two cyclical stocks and four defensive stocks with compelling stories behind them. These aren’t necessarily stocks to buy right away. Many of the best stocks for 2021 are already in strong uptrends and their prices are overbought. If that’s the case, it would be a good idea to wait for market weakness which is quite likely in the next few months.
- Software stock for 2021
- 5G stock for 2021
- Gaming stock for 2021
- Emerging market stock for 2021
- Healthcare technology stock for 2021
- Cannabis stock for 2021
- Travel stock for 2021
- Basic materials stock for 2021
- Pharmaceutical stock for 2021
- Retail stock for 2021
- Healthcare stock for 2021
- Dividend stock for 2021
Software stock for 2021: Twilio (Nasdaq: TWLO)
Software and related industries like cloud computing and SaaS stocks have been the best performing industries over the last few years. There are lots of great software stocks, but if we had to narrow the list down to one stock right now, it would be Twilio. The reason is that Twilio has become an important link between software and communication. Twilio provides tools that developers can use to incorporate voice, text, video, and email into software products.
As competition between SaaS platforms and other software providers increases, companies must drive engagement to drive growth. Recent acquisitions will also allow the company to offer customer data and CRM intelligence solutions to clients. Twilio’s annual revenue growth has averaged 66% over the past five years, and revenue from existing customers has also grown. However, the stock is not cheap and trades on a price-to-sales ratio of 36. The valuation is a medium-term risk, but a correction would offer a great opportunity for long term investors.
5G stock for 2021: Marvell Technology Group (Nasdaq: MRVL)
Fifth generation (5G) wireless technology is one of the investment megatrends we previously identified. Marvell is undoubtedly one of the best stocks for 2021 in the 5G industry. The company is a fabless semiconductor producer and the processors it designs are used in 5G base stations. Several major equipment vendors, including Samsung and Nokia, use Marvell’s processors.
The rollout of 5G technology is still gathering momentum and there is still some uncertainty in some areas of the value chain. However, the number of 5G base stations around the world is certain to increase sharply for the foreseeable future. Marvell also develops chips for the cloud storage and automotive industries, so it offers exposure to more than one growth industry. The valuation is slightly higher than its peers, but this reflects its exposure to the three growing industries.
Gaming stock for 2021: Activision Blizzard (Nasdaq: ATVI)
Despite strong performance in 2020, gaming stocks are expected to continue performing well this year. Activision Blizzard, which is a leading game publisher, lagged somewhat last year, but many expect it to catch up in 2021. The stock fell out of favour as investors chased other faster growing gaming companies. But these companies are now quite expensive, while Activision is relatively undervalued.
Meanwhile, the company’s margins have improved, and it still owns one of the most valuable portfolios of popular franchises, led by Call of Duty. Morgan Stanley recently named the stock as its top pick in the industry. The broker has a price target on the stock of $108, implying upside of 22%. The stock price also recently made a new high attracting the attention of momentum traders.
Emerging market stock for 2021: MercadoLibre (Nasdaq: MELI)
MercadoLibre is an ecommerce platform based in Argentina and operating throughout South America. It is often described as the “Amazon of Latin America”, but also includes a very successful fintech component. The stock therefore offers investors exposure to both ecommerce and fintech in an important emerging market region. Besides a marketplace for new and used goods, the company manages online stores for corporates, and provides logistical services, payment gateways and processing and credit services.
The company is experiencing strong growth in user and transaction numbers and in revenue. The stock price has risen 170% over the past 12 months and according to most valuation metrics, the current valuation is extremely high. However, like Amazon, MercadoLibre is reinvesting its income in its fulfillment capabilities – so the valuation may be justified. Nevertheless, you will probably want to wait for a correction during the course of 2021 before investing.
Healthcare technology stock for 2021: Teladoc Health (Nasdaq: TDOC)
The pandemic in 2020 caused the trend toward remote work, which was already underway, to accelerate. This resulted in earnings growth of 730% for Zoom. Another trend that was already underway was the growth in telehealth services. In this sense, Teladoc Health can be thought of as the “Zoom of the healthcare industry”. Teladoc Health is a leader in the telehealth field and has already seen revenue growth accelerate to 109% year on year. But this is a trend that is only just beginning and has a long way to go.
The cost of healthcare is the biggest challenge to the health industry. Technology can go a long way to reducing those costs for individuals and employers. Teladoc Health offers a wide range of on demand remote medical services. The company is also adding to its portfolio of products by making acquisitions, particularly in the field of medical data and artificial intelligence. The technical picture also suggest Teladoc could be one of the best stocks for 2021.
Cannabis stock for 2021: Trulieve (US OTC Market: TCNFF)
Cannabis stocks have experienced a strong rally over the last two months. This is in anticipation of the Biden administration being more favourable for the cannabis industry in the US. There are substantial risks to cannabis stocks, however. Firstly, while Biden is keen to decriminalise cannabis – he is not yet in favour of full legalization. He is also likely to prioritise other issues for at least the first 6 months of his administration. Secondly, valuations are extremely stretched and in many cases unrealistic.
This makes Trulieve a safer bet and possibly one of the best stocks for 2021 in the cannabis sector. Trulieve focuses most of its efforts in Florida where medical marijuana is legal. The company has 68 dispensaries and a strong and well-known brand in the state. This means marketing costs are much lower than its competitors. This is also why Trulieve is the most profitable marijuana company in the world.
Trulieve is therefore a far more defensive pick in the sector – but there is still upside to come for the stock. If and when cannabis is legalized across the US, and when recreational marijuana is legalized in Florida, Trulieve is perfectly positioned. It already has a large distribution network and a strong brand in the state.
Travel stock for 2021: Hilton Worldwide Holdings (NYSE: HLT)
2020 was obviously a terrible year for any company in the travel and tourism industry. But travel bans and lockdowns have resulted in a build-up in demand that will be unleashed as people are able to travel again. It is likely that anyone wanting to travel will need a certificate to prove they have been vaccinated.
In the second quarter vaccines should be widely available to anyone wanting to travel, which will be just in time for the Northern hemisphere’s summer season. Because large hotel chains like Hilton Worldwide are well capitalised, they will not have a problem getting back to full capacity when demand returns. In fact, all three big hotel groups (Hilton, Marriott, and InterContinental) should all perform well when global travel opens up again.
With 6,100 hotels in 119 countries, Hilton is slightly more diversified. Also, Hilton Worldwide operates a large number of franchise hotels which makes it slightly more capital efficient. The stock price has already regained its all-time high in anticipation of travel normalizing and is now overbought. You may get a better opportunity in the next few months if the price pulls back from these levels.
Basic materials stock for 2021: Freeport-McMoRan (NYSE: FCX)
Freeport should perform well in the coming months and likely is one of the best stocks for 2021 in the mining and resource industries. The primary reason to own Freeport is that it is one of the largest copper producers in the world. Copper demand is growing fast due to demand from the renewable energy and electric vehicle industries. These are of course growing industries, which will benefit from the Biden presidency in the US.
Freeport is also a leading gold miner. As we previously pointed out, gold is an effective hedge against market volatility and inflation. The gold price is already benefiting due to fiscal stimulus, “money printing”, in the wake of the global recession in 2020. Mining stocks can be notoriously volatile. However, Freeport is one of the more conservative mining stocks, and the prices of both gold and copper are in a strong uptrend.
Pharmaceutical stock for 2021: Johnson & Johnson (NYSE: JNJ)
Aside from the tech sector, healthcare and pharmaceuticals have been the strongest performing sectors for several years. Many of the best stocks for 2021 are likely to also be in the healthcare sector. Johnson & Johnson is particularly well positioned for 2021. Its COVID-19 vaccine which is in line to be the third approved vaccine in the US is just one reason to consider the stock. Johnson & Johnson has three divisions: pharmaceuticals, medical devices, and consumer health. The consumer health division is one of the most defensive business units in the world.
The other two are the growth drivers – but both were impacted by the pandemic in 2020. Elective treatments were delayed due to the pandemic, but this pent-up demand should result in an earnings boost over the course of 2021. Because the vaccine has not yet been approved by the FDA, it is not fully discounted in the share price. Also, the Johnson & Johnson vaccine requires just one dose, unlike the Pfizer and Moderna vaccines. This may give it a distinct advantage.
Retail stock for 2021: Walmart (NYSE: WMT)
There are several reasons to own Walmart at the moment. For a start, this company can perform well regardless of whether the COVID-19 pandemic drags on for longer or shorter than expected. Going into 2020, Walmart’s ecommerce business was already growing rapidly. The pandemic fast tracked that growth and will continue to do so while it continues. However, when the economy eventually returns to normal, Walmart’s massive chain of physical stores should more than make up for any slowdown in ecommerce revenue.
Walmart is also a stock that can play an important role in reducing portfolio volatility. Its share price tends to rise when other stocks are weak, and drift lower when other stocks are strong. Walmart therefore offers the benefits of defensive stocks, as well as a digital growth driver. It is no surprise then that several Wall Street analysts are becoming increasingly bullish on the stock.
Healthcare stock for 2021: UnitedHealth Group (NYSE: UNH)
UnitedHealth is a diversified healthcare company that provides health insurance and healthcare services. In 2020, the company proved just how well it can adapt to changing environments by offering online consultations by inhouse care providers. Joe Biden’s expected and ultimate election victory has resulted in some uncertainty around companies like UNH. The result is that these companies are now attractively valued relative to the rest of the market.
However, UnitedHealth is still an important provider of healthcare in the US, and it has now proved just how well it can adapt. UNH is also well diversified and has a long history of consistent dividend growth. This will make the stock attractive to investors when confidence in the sector returns.
Dividend stock for 2021: Verizon Communications (NYSE: VZ)
Telecom giant Verizon certainly isn’t one of the most exciting companies around. But it is still the second largest telecom company in the US by revenue. It also pays a 4% dividend that is well supported by strong cash flows. Verizon’s growth is slow and steady but may improve slightly as its 5G network is rolled out. In fact, the company already has some of the best 5G coverage in the US.
The stock trades at just 11 times earnings, a large discount to the rest of the market. It also has a 19% operating margin and a 29% return on equity. With these numbers, any market volatility would make Verizon a safe haven stock. This makes it one of the best stocks for 2021 for dividend investors who do not want to take too much risk.
Conclusion: Stocks for 2021
Picking the best stocks for 2021 isn’t easy given all the unknowns. As always a mix of exposure to growth stocks and more defensive assets is the best way to balance risk and return. There is bound to be some volatility during the course of the year and investors should be ready to take advantage of any price weakness.