5 Things Investors Should Prepare For In 2021 And 2 New Stock Ideas

Summary

• It is wise to have one's portfolio positioned for many different scenarios in 2021.
• In this article, I share 5 things I've prepared for my portfolio, given the backdrop of an uneven economic reopening around the world, and further stimulus in the US.
• I also review the 12 ideas I shared a few weeks ago, and share two more individual stock ideas in this article.
• I do much more than just articles at The Cyclical Investor’s Club: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »

Introduction

After a great 2019 and 2020, 2021 has been off to a good start for my stock portfolio, but when I observe other investors and read other stock writers, I see a lot of blanket extremism. There are crypto extremists who think bitcoin is the greatest investment opportunity of our lifetime and that it can only go up; there are innovation extremists whose portfolios are full of the stocks of recent IPOs that have no earnings; then, there are extremists in the opposite direction who are holding excessive amounts of cash and long-term bonds; and there are also extremists of the indexing variety who buy index funds with no clue about the valuation of what they are buying.

While some of these investors will end up doing okay over the long-term, I think that over the course of the next economic cycle, I expect all of these investors will underperform investors who carefully select individual stocks of quality businesses while they are trading at reasonable prices and hold them until they become expensive or the business quality declines.

About three weeks ago, on February 11th, I published an article titled "There Are Bubbles But Cash Is Not The Place To Be, Here Are 10 Stocks To Buy Now," and in that article, I shared more than 10 ideas I thought were worth buying. The point of the article was that many parts of the market were at extremes, but there remained opportunities still worth buying for the medium and long-term. I want to take a moment here to examine the returns of those ideas and compare them with the returns of the market indices over the past few weeks.

Data by YCharts

Above are the returns of Invesco QQQ ETF (QQQ) and SPDR S&P 500 Trust ETF (SPY), along with the one non-stock idea I suggested in the article, Aberdeen Standard Physical Platinum Shares ETF (PPLT). As you can see, all of them traded down since the article was published, with PPLT trading down the most. I think PPLT was mostly trading down on temporary US dollar strength, and I'll come back to that discussion later in the article. Now let's look at the performance of the stock suggestions from that article.

Data by YCharts

Of the eleven stock ideas I shared in my last article that I thought were good buys, only Facebook (FB) is slightly negative, with a return of -2.26% (it's worth noting, though, that its most appropriate benchmark, the QQQ was down -7.74% over the same period). The other ten stock ideas were all positive, most significantly so. Including the PPLT decline, as a group, these 12 ideas that I shared about three weeks ago are up an average +10.21% compared to a -1.81% return from SPY.

It's worth noting that these ideas came from several different sectors and industries, but the main thing they had in common was that they were quality businesses trading at good valuations. So, even while the S&P 500 was down, and the Nasdaq was down even further, this basket produced double-digit returns. This was a unique situation where the markets moved fairly quickly, and I had no idea the market would move as quickly as it did, so I'm not suggesting every month will be like this one.

It is entirely possible these returns could have been spread out over an entire year instead. And that's fine. I'm not trying to precisely time anything when I buy a stock. Usually, I buy a stock and forget about it for a while, and wait for the market to change its mind about it over the next 2-3 years. But I also try to keep a relatively balanced portfolio and estimate roughly where we are in the economic cycle, and that is what most of this article will be about: What should investors be prepared to experience in 2021?

Source: Pixabay

Expect Rotation and Reflation

This is one that has been obvious to me for a while, but for which a lot of investors seemed unaware until the recent market sell-off. We now have effective vaccines and COVID will effectively be a thing of the past by the end of summer 2021 in the US. The stocks that benefited from COVID will no longer have a tailwind, and since most of them are trading at very high valuations, their prices will come down. Meanwhile, those businesses that were hurt by COVID, but were not damaged seriously (i.e. didn't have to issue new shares or take on significant amounts of new debt) have been, and will continue to be, attractive investments.

These are stocks like the refiners I suggested in my last article, and the financials and industrials. There will be stocks like airlines and cruise lines and mall REITs that will clearly benefit from reopening, but most of those businesses were damaged too much the past year for them to be high enough quality for me, even if the stock prices will likely rally this year as well. I always buy stocks that are high enough quality that I would feel comfortable holding them if a recession occurred tomorrow.

For example, on October 22nd, 2019 I published an article titled "EOG Resources: I'm Buying The Dip." And I bought the stock around that time. Since then the energy sector has been hit by some of the worse headwinds since the 1980s, including a pandemic shutdown, a global recession, and oil briefly trading negative last May. But because EOG was high enough quality, I simply held the stock through the downturn and never considered selling it even though at one point last March it was down over -50% from the price I had paid for it.

Data by YCharts

Now, EOG stock has produced a positive return, even though it is still trailing the return of the S&P 500 over this time period. If EOG had been lower quality and had the potential to go to zero like AMC Entertainment (AMC) or Carnival (CCL) did, I may have been tempted to sell the stock near the bottom. And while I don't expect a recession this year or next year, black swans do happen, so stocks like AMC and CCL and others, while they will likely benefit from a reopening, are not high enough quality to attract me and remain too risky for me.

In fact, I think the danger of investors buying lower quality reopening stocks is one of the bigger landmines out there for medium and long-term investors right now, because while they might get the reopening theme right, and also get the short-term momentum right, eventually it's the earnings of the businesses that will drive the medium and long-term returns, and those factors still don't look great for some of the lower quality reopening stocks.

If we limit ourselves to higher quality reopening and reflation stocks that still have upside left, like T. Rowe Price (TROW) or BorgWarner (BWA), or Principal Financial Group (PFG), then I think they are relatively good bets over the next two years. However, we will want to take profits at some point before the next recession or industrial downcycle because usually, these types of stocks suffer a lot during downturns. In other words, they are good medium-term bets, but not necessarily buy-&-hold forever stocks if you are trying to maximize returns. (Even if they are high quality enough to hold during a downturn if we have to.)

The important part to remember about the rotation is that the overall market is not an indication of the potential returns an investor can get if they select stocks individually. This rotation will cause a huge deviation in the returns of stock investors who know what they are doing and indexers who do not. I think 20% returns are possible for good stock pickers this year even if the S&P 500 ends up being flat on the year.

Expect The Market To Rise +20%

I think it is entirely possible that with the reopening of the economy and the extra stimulus that is likely to be put into the US economy over the next month, that the overall market could rise another +20% this year. There could be enough retail money flowing into the market to completely reverse the minor tech sell-off we've seen the past month and for a stock like Tesla (TSLA) to go on and make new highs, as well as for new IPOs like Robinhood to rocket to the moon, and so on. So investors should be prepared for this. I'm a long-only investor so I don't short stocks, but long/short investors should be very careful with their short ideas over the next 6-12 months. I wouldn't be shorting anything no matter how expensive it gets or no matter how much the momentum shifted down the past month.

Additionally, I would not be holding excessive amounts of cash. I currently have roughly 15% cash equivalent and no bonds even though I think the market as a whole is very expensive right now. I won't hesitate to take profits in the stocks I own as they become overvalued this year, but I am not hiding in cash. There are still a few stocks worth buying.

Expect The Market To Fall -20%

If this appears to be incongruent with my last expectation, it is not. The market can both fall -20% and rise +20% in the same year, and investors should be prepared for both possibilities. I think investors should have enough cash on hand so that they could put most of it to work if the market falls -20%, but probably not much more cash than that. The value stocks that I am currently watching and waiting to buy, actually haven't fallen nearly as much as the wider market, so I'm unlikely to have many buying opportunities, even in a shallow bear market, and that's why I'm not holding lots of cash.

I only have an amount that I think I have a realistic possibility to buy stocks with over the next year or two. Any more than that will likely just be a drag on returns. However, we shouldn't expect that the stimulus-fueled market we've had in 2020 and 2021 will continue much beyond 2022, and it's likely the market will start looking forward to 2022 at some point in 2021, so, a sell-off can basically happen at any time. Investors should be prepared to buy that dip if values become available.

Expect Inflation

At this point, I think it should be fairly obvious that we are going to get inflation of one kind or another over the next year or two, and potentially it could be more than expected as stimulus gets spent over the next two years and as economies reopen. This is another reason not to sit on more cash than you can invest during a correction, and why long-term bonds are unattractive. It's also why I think some precious metals exposure like gold (GLD) is a reasonable alternative to holding too much cash (though I prefer owning stocks).

Expect An Uneven Reopening

While the US mostly failed to contain the pandemic in 2020, because of vaccine development and distribution and new economic stimulus along with continued support from the Federal Reserve, the US stands to have one of the fastest and strongest economic reopenings in the world in 2021. For the next six months, this should be very bullish for the US stock market and for the US dollar. We've seen signs this past week that despite massive amounts of money being pumped into the US economy, the dollar strengthened. I expect that because of the early and very strong economic recovery in the US that the dollar will remain relatively strong for a decent part of 2021, but that it will eventually weaken as the rest of the world is vaccinated and reopens as well.

If this happens along with a rising US stock market, it is likely that I'll steadily take profits in some of my big cyclical winners and shift that money internationally. I don't have any specific international ideas today, but if the US market rises another 10% don't think there will be many attractive ideas left in the US at that time, and it will probably be a good time to look for value overseas.

Right now, I'm finding an idea or two still in the US market, and next, I'll briefly share two ideas I bought from the S&P 500 index since my last public article. These won't be full analyses because I'm very busy and don't have time to write those this month, but much like my last article, they should at least provide some ideas for you to consider researching to see if they are right for you, and they illustrate that there are parts of the market worth buying, still.

Merck (MRK)

After struggling with earnings growth for nearly 15 years, Merck has put together five straight years of earnings growth of about 8-9% per year. Meanwhile, the stock is trading at an 11.23 forward P/E. I estimate they trade at a PEG ratio of 1.33 while the wider market is trading at a PEG of around 3. Analysts expect them to continue to grow earnings at about this rate for the next few years.

This is a quality business trading at a fair price and I bought the stock a few weeks ago. (For individual stock purchases I usually take about a 1% portfolio weighted initial position.) While I don't typically focus much on dividends because I'm a total return investor, it also pays a respectable 3.56% dividend yield and it has a AA- credit rating from S&P. It's a stock that should do well over the medium and long-term no matter what the wider index does.

Cigna (CI)

There are a couple of risks with Cigna that in a perfect world I would avoid. One of those is M&A risk. I tend to avoid stocks that have had significant and recent M&A activity because usually acquirers overpay and it takes a few years for them to admit it and for it to show up in the numbers. So Cigna's fairly recent Express Scripts M&A is something I would typically prefer to avoid, but as far as I can tell it looks to be going okay.

Additionally, there is some political risk as well if Democrats decide to make major healthcare reforms. I'm betting that major reforms don't happen with Washington being busy with COVID and the Senate currently split 50/50. When we toss in a very expensive overall stock market, it makes me more willing to dip my toes in a stock like Cigna if the price is right.

I estimate Cigna's earnings growth rate at about 13.22% since 2014 and that they currently have a forward P/E ratio of about 11.41. That produces a PEG ratio of 0.86 in a market where the average PEG is triple that. Analysts expect EPS to continue growing in the 10-13% range for the next three years and they have an A- credit rating from S&P. So, once again, while there are risks to the stock, we are getting a significant margin of safety and an exceptional value relative to the rest of the stock market. We took a position in the Cyclical Investor's Club last week, and while most of the market was selling off, Cigna was rising.

Data by YCharts

I think the stock still remains an exceptional value with a good risk/reward, so I have a 1% portfolio weighted position in it as well.

Conclusion

It's time for investors to cast aside any mono-lithic or extremist macro views about the US market. 2020 was a stock-picker's market and 2021 will be a stock-picker's market as well. Extreme views of the market (i.e. too much cash, too much speculative growth, or too much blanket index buying) will not be rewarded as well as good stock picking over the next 12-24 months. Individual stock selection of quality businesses trading at reasonable prices, and an understanding that the economy is still early cycle and not close to a recession, will likely be rewarded handsomely.

Analyst’s Disclosure: I am/we are long EOG, MRK, CI, PPLT, VLO, HFC, PSX, BWA, PFG, TROW, FB, ANTM, GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I recently took profits in PBCT after their buyout offer. I'm long all of my other suggestions.

Comments

[SeekingTruth]

Fine article that I agree with all the way.

Only thing I might add in a stick-in-the-mud fashion is that stocks do not need a Recession to correct 15 to 30%, and I have witnessed it many times.

Appreciate all your good work, and the comments are very solid also - Thanks.

[Cory Cramer]

@SeekingTruth Thanks. Very true about not needing a recession. I think that is especially true over the next few years when there is a good chance the market will decline well before (and potentially without) an official recession.

[alereyes]

Strong Temper is an asset and you seem to have it. Excellent article. I’m a value investor who seeks for business whose stocks can yield at least a 15% CAGR based upon my evaluations on ROE, ROIC and eps growth. Most of the excellent business that I have found are offering a 7 to 8% CAGR at present value. Of course sitting on cash it’s not a good idea, but buying something that will lead to a smaller return, that the one from the stock market, with the inherent risk of a drop in price, it’s not a wise play. Not because the erode in capital in the short term, If one was smart enough to buy good business and did a good evaluation, but by the fact, that one paid a big price for a low yield, and patience could have rewarded those who have it.

[Mili21]

@axereyes2
".......stocks can yield at least a 15% CAGR .......'
Curious to know few names in current markets that you can think qualifies the statement.

[Cory Cramer]

@axereyes2 Thanks. It's going to get really difficult the next year or so since I don't think anyone knows what inflation is going to do, and that could really put pressure on folks holding a lot of cash. Perhaps the best thing I can promote right now is portfolio balance and understanding that a recession is not right around the corner.

[alereyes]

@v38134 Me too!. I only know BABA at current price based upon my valuation, that could be wrong as any other valuation. But still waiting for it, to go lower to continue buying more.

FB too, but not at current price, it´s a two edge sword business with lots of changes due to no mature customers that change their minds in a split of a second and lots of competitors playing hard. But both greath businesses.

GOOGL has not rival in what they do, but for me, I would buy it only, if it goes below $1400 and, that is not going to happen, unless there is another market crash, that no one knows it will happen.

Energy Oil stocks are making a good run, but I´m in the oil business since 1996 and I can tell you that is not the come back as media want to make us believe. ( I wanted to buy TPL in nov at $450, but I could not valuate it, so, I passed. Also I have lots of friends in the oil business working in the US and being layed off) As 70% of oil is used for fuel, there will be no real growth for the next decade, only a short living momentum for 2021 and then, , maybe, going down again, I would not consider any investment in commodity type business, no matter how attractive they will be in 2021. My focus is in business that will last for decades and can increase their cash flow and profits in a organic way, which is very hard to know, but at least. I think, I can tell which have less chances to do so.

Since I´m not a fund manager, I have that little edge of not being in a hurry. I have money in other liquid and iliquid assets that yields 6% to 8%, As well in the stock market. Let´s say: 30% stocks, 40% Real state (yields 8% from rents), and 30% cash at 6% yield in Ecuador (in USD) and 3% yield in Mexico (in MXN) and in the USA with my broker with 0.000000000000001% yield, damn!!!

[rgranlund]

Excellent reminder to (Boy Scout motto) always ‘be prepared.’

[Cory Cramer]

@rgranlund Thanks for the comment. I've found it helps one to stay rational if they've thought about possibilities in advance.

[Mili21]

Very balanced article.
MRK is trading in range but dividend growth is compensating for that.
I purchased UNH in 2009. My reason for buying UNH with full conviction was an insurance offered to all employees at my workplace, which is a fortune 500 company. If my company has a contract with UNH for 5 years or so and AARP is also through UNH, there is hardly a chance UNH to go burst.
Suspended DRIP about 4 years back as well as took out my investment money, leaving good chunk of shares still invested in it.
UNH is also one of the very few companies with CAGR > 15% for last ~20 years.
seekingalpha.com/...
Unfortunately, the leading health insurance companies are trading too high in price (> $250) which could be pricey for some investors.

[Cory Cramer]

@v38134 Thanks for the comment. I wish I would have bought UNH in 2009, but I was too dumb.

[Mili21]

@Cory Cramer
Looking at your writing / investing skills and time it required to acquire those skills, you were smart back then just that you didn't focus on UNH from investment perspective.

[Cory Cramer]

@v38134 I made one big 'investing' decision at that time and it was buying a house in the town and neighborhood that I wanted, which was big enough so that even with a growing family I would never have to move. My attention at the time was definitely focused there and I bought near the market bottom.

That said, I learned an important lesson about politics and investing from stocks like UNH, because of my opposition to Obamacare at the time, it clouded my investing judgment, and I missed some opportunities that should have been clear. The good part of that story is I learned my lesson. So I was able to see very clearly through the crazy politics of the past 5 years and able to focus on the investment opportunities that many investors got wrong (and in some cases, continue to get wrong) because I no longer let political ideology cloud my investing judgment.

[Hugh Arhue]

@Cory Cramer Always a well thought out, well reasoned read on the market and a good presentation of solid investment ideas. Thank you for your continued articles. With this Rotation in the market, this only leads more thought on a "cyclical" not cynical view of market sector rotation and choosing quality characteristics (factors).

[Cory Cramer]

@Hugh Arhue Thanks, Hugh. It's a very dynamic situation that I'm afraid most retail investors probably don't understand. My portfolio has become quite disconnected from the moves of the major indices (in a good way) but it's very hard to explain and teach what is happening to investors who don't already understand it. You've followed my work long enough that you have probably witnessed my many different attempts to do so with varying degrees of success :)

[BM Cashflow Detective]

If there's one thing I've learned in the last 20+ years, it's that it has actually been a stock-picker's market every single year. Sometimes with more and sometimes with fewer offers. So in 2021 and also in 2022 I will prepare for the fact that, unsurprisingly, it will become a stock picker's market again. In this respect, I am always well prepared, even well beyond the year 2023.

I like your stock suggestions and I already own some of them or have bought them in the last few months.
I'm long $ANTM $BMY $VLO $PSX $TROW $LMT $PFG $MRK.

There's still a lot of talk about a bursting bubble. Wonderful. As long as everyone is talking about it, it won't happen. False fear. In other words. The wall of fear is still intact. And the stocks can climb up along it. The market is only anticipating and pricing in the further recovery of the Covid 19 crisis. That's all. No reasons to get excited, just to keep buying things prudently.

www.advisorperspectives.com/...

The companies' future results will underpin current expectations. It would only be appropriate to worry if there were no more bubble items. Or statements like "This time it's different again" would appear. Until then, I recommend continuing to hold stocks and enjoy the trip.

[Cory Cramer]

@BM Cashflow Detective Agreed. Value is getting harder to find in the US, but that is based on a pretty slow earnings recovery from the 2009 recession. With the amount of stimulus we have coming, earnings could grow much faster than expected in 2021 and 2022 and much faster compared to the previous cycle. I don't count on it with my estimates because I tend to be pretty conservative, but if the economy bounces back fast, then valuations won't look so crazy and the calls for an overall bubble this year won't turn out to be true.

[Illius]

blah blah blah followed by Mrk and Cigna.

[Cory Cramer]

@Illius I disagree. I'm pointing out investors can still find value in this market no matter what major indices are doing.

[almoni]

I searched for a long time for the gist of this article and here it is ====
It's only $29/month,\с\

[Cory Cramer]

@almoni I gave some examples of what one's overall portfolio (and mindset) should be prepared for, and I get two actionable ideas to go along with it. I also shared the results of past ideas relative to the major indices.

[almoni]

@Cory Cramer among traders \\ I get two actionable ideas \\
the idea is called a trading view and includes an entry point- stop loss- and Tprofit level vs time horizon . have you done this ?

[Cory Cramer]

@almoni This is a portfolio strategy article. Most portfolio strategy articles don't even mention individual ideas. So, my goal with those was to point readers in the direction of some possible values within the S&P 500 rather than just write a vague article about portfolio positioning. I didn't have time to do a full write-up on each of them, which is what I said in the article.
I think investors are making a mistake if their portfolios reflect some of the extreme views that people currently have about the market, and that positioning for the ranges of possibilities I discuss in the article is wise. The idea of sharing a couple of simple ideas with metrics that are far better than the average stock in the market is to show that there are some options that are superior than cash. I have 350+ free articles on this site for readers to read up on my basic methods. The vast majority of those articles are on indiviudal stocks.

[Greenhorn Investor]

Thank you for the article

[Cory Cramer]

@Greenhorn Investor Thanks Greenhorn.

[Disciple5]

I like your picks and am long both MRK and CI.

[Cory Cramer]

@Disciple5 Great minds think alike :)

[Buyandhold 2012]

Cory, you like Cigna.

Good.

So does my mother.

But I never try to predict what the stock market will do next because it doesn't matter.

If it goes up, I get richer. That's nice. It's nice to feel the wealth effect. Let's you loosen your purse strings a little. Take your car to the car wash instead of washing it in your driveway.

If it goes down, I can buy more shares of my favorite stocks while they are on sale.

If it stays flat, I can still take my schnauzer to the bank to deposit dividend checks.

And speaking of dividends, my dividend income was up last year. It goes up every year. Which means that I will have to pay more taxes. I'm waiting for my CPA to give me the bad news.

I wouldn't mind paying taxes if I could decide where my taxes were spent. But it annoys me when I read how my taxes are wasted. $125 for an aspirin. $450 for a hammer.

They should give me the tax money and I could buy them quite a few aspirin for $125 and quite a few hammers for $450.

And don't even get me started on those windmills in Texas.

Windmills are a tourist attraction in Holland.

No one goes to Texas to see windmills.

People go to Texas to line dance.

[Cory Cramer]

@Buyandhold 2012 If your mother and I agree, we must be on to something! Interestingly, I don't focus on dividends much, but because I tend to buy stocks when they are cheap, I get them anyway.

[Illius]

@Buyandhold 2012 Nothing like that One-Star state.
Just don't go there at all.

[Buyandhold 2012]

@Illius

Texas is wonderful.

Wide open spaces.

Cattle.

Business friendly.

Line dancing.

And Austin is like Boston, so you can visit New England without ever leaving Texas.

I have some friends in Texas.

They always say:

I was born and raised in Texas
And when I die, I'll be Texas dead.

[Growth2025]

Investing 101: Investors can make money in up and down markets.

[Cory Cramer]

@Growth2025 Sometimes everything goes down for a while, but that wasn't the case post-2000 and I don't think it's going to be the case in 2021.

[g23riel]

Thanks for somehow still finding a few valuation gems within a sea of overpriced equities.

[Cory Cramer]

@g23riel It's getting harder, but fortunately we've made a lot of money the past few years. So, I'm not going to complain much after earning quadruple the long-term market average three years in a row. We might have to wait for earnings growth to catch up for a while after 2021.