This year was full of firsts and I can’t wait to put an end to it today. The pandemic brought about a global reset button. We had to adapt and relearn many basic things we took for granted before the virus. In March when we shut down the world, I would have thought that stocks would take ages to recover. That turned out to be a pleasant surprise as indices went on to set record after record.
The buy-the-dip concept has never been more right. Within this prism, today we identify stocks to own for 2021 regardless of the less-than-ideal environment.
The macroeconomic conditions are suffering two current ails. First is the virus since it’s clearly not under control yet. We’ve had our first wave of vaccination start with those on the front line. Soon we will start inoculating the public but that will take several months. It’s a great start for the year on that front.
Second, we have another potential political mess coming from Georgia this weekend. There are two runoff races there that could have major implications. The democrats have the opportunity to secure both the House and the Senate. This makes people nervous because they can pretty much do what ever they want if that happens. Wall Street may be counting on having a lame duck session to start Biden’s term. Any change from that could bring short term volatility.
The three stocks we picked today will survive whatever dips may come from the Georgia elections. They are:
Stocks to Buy for 2021: Amazon (AMZN)
Source: Charts by TradingView
We cannot talk about buying stocks without first picking the poster child winner of the mega caps: Amazon. The pandemic made it so that it became the default place everyone shopped. Main street America shuttered its doors so people flocked to the largest e-retailer on the planet. Business has never been better for Jeff Bezos, so it’s not a surprise to see Amazon stock make new highs.
Therein lies the opportunity because it has not made a new high since August. Meanwhile the indices have clobbered theirs. Therefore, there could be a catch up trade from Amazon and soon.
I predict that the setup will come from one of two ways. First is to buy the rip above $3,365 where it last failed in early November. If the bulls can do that they can trigger a 200+ point rally. Arguably the breakout already started from $3,265.
The second entry point would be to buy the dip into the $3,200 support. That zone extends to $3,120 since it is more like a mattress than a hard floor. That is where the bulls have established the lower limits of an ascending channel. I bet they will stick to it again so the dips are buying opportunities.
Zooming out to a weekly chart shows that the real upside potential for the summer of 2021 is closer to $3,800.
The rally that started in May is consolidating here to form a base. They bulls will use this as the platform for equal extension up bringing $400 to $600 from the highs. I know these sound like astronomical numbers, but all you have to do is look back to see what’s possible.
Source: Charts by TradingView
What Chipotle did this year was nothing short of miraculous. While restaurants were dying from the pandemic, CMG was booming. They turned strong positive comps even during the initial lockdown when not many were ready.
Like Amazon, it would seem like Chipotle got lucky, but in this case they made their own luck. They saw the trend coming and the virus forced us to expedite it all this year. Speed and throughput played a big role in their success.
Customers can be in and out in a jiffy. The more people you can push through your store the faster the growth. They also made great use of the web and app. The concept manifested itself through the profit and loss statement. It’s not magic but it is darn impressive. It also doesn’t hurt that the food is good.
Fundamentally, CMG stock is not cheap, not even close to it. It has a huge price-to-earnings ratio of 166x. Clearly the investors correctly give it a lot of credit in that department. It sounds outrageous but it is not for two reasons. First, it has a low price-to-sales of 6.8x. This means that owners of the stock are realistic. The P/S contains less than seven years of sales. Compare that to Zoom’s (NASDAQ:ZM) 54x, for example.
Second, management has crushed expectations. In five years they grew revenues by 1.5 times. What is more shocking is that they grew net income 10 fold. Gross profits went from $352 million in 2016 to $920 million in 2019. They couldn’t deliver this if they were managing their P/E lower.
It’s okay to spend a lot if they are showing results, just ask Amazon. They too were under pressure to operate with better leverage. Had they listened to that advice they would likely not have created Amazon Web Services, aka “the cloud.”
Source: Charts by TradingView
As controversial as 2021 was, Facebook is used to that. It has created its own drama for years. Case in point, the messes that came from the Cambridge Analytica incident, the 2016 elections, and Libra. This year they added the potential breakup that the government might pursue.
None of these headline shakers rattled the investors for long. I bet this will continue for a very simple reason: Facebook is killing it on execution.
Its clients, the advertisers, get their money’s worth. And for as long as they have the user metrics that they do, advertisers will stick around. I’ve long said that it would take a special kind of idiot to mess up the potential of a billion users. Well they are now up to 2.7 billion monthly active users. That is a whole lot of potential to ignore. This definitely belongs on a list of stocks to own for 2021 and beyond.
I bet that the growth will continue and the financial metrics will improve. Since 2016 they almost tripled their revenues and grew their net income 2.5 times. Critics who find fault in that should go back to finance school. So what if it is controversial from time to time? They are doers so they break a few eggs in the process.
I imagine that they will prevail over the government in the U.S. courts. Even if they don’t, owners of FB stock will have their pick of three excellent smaller companies. Be it Facebook, Instagram or WhatsApp.
It is hard to find stocks to own before the new year starts. This is especially true when markets are at their highs and in spite of bad economics. Buying this late in the rally leaves the investors vulnerable to surprise corrections. Therefore, it is important to be humble and not take full positions all at once. This leaves room to manage the risk should price go the wrong way a bit.
Using options can help mitigate the risk. Investors can buy temporary insurance when they expect turbulence. There are also techniques that allow bullish positions that don’t require rallies to profit. Selling put options in stocks one wants to own is one. You can find an example of how this works in a recent article I wrote.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.