Many individuals often wonder, “Why does the stock market continue to go up during a global pandemic, and what can I buy during this volatile time?” While it is true, many stocks have seen their all time lows this year, and it has been quite difficult to navigate these uncharted waters, it has been quite an opportune year to invest. Many investors have found this year to be one of their most profitable thus far. In this blog, I will outline the most imperative stocks to own during the new year, which ones will perform well based upon some metrics, and much more.
2020 was a year filled with stimulus whether that stimulus be monetary or fiscal. Some of the notable moves or tools the Fed had implemented throughout the year were QE, or quantitative easing. What is QE? It’s essentially where the government will buy bonds or other securities in the longer term in order to inject more money into the economy. It is an unusual, but useful form of monetary policy. This year, the Fed bought upwards of $6 million in assets. We saw all sorts of monetary policy as well, injecting money supply at a higher rate than what we currently have. This was seen in the stimulus bills. There is a caveat to said deals. While Americans needed the money given to them, these bills will eventually be the cause of massive rates of inflation in years to come. The more money is printed/created, the less valuable the dollar becomes, which increases inflationary rates. The Fed would love to keep their inflation rates between 1.5-2.0%. At this current time, the inflation rate in America is at 1.93%. We saw the inflation rate hit 2.63% post global financial crisis a decade ago.
Image: FRED Graph
We saw some stocks gain big this year, but what are we looking forward to next year? Here are a few stocks I’m looking at for 2021. First, Micron Technology, $MU. Micron is a company that I have consistently invested in in the past, but typically for shorter periods of time, 3-4 months. This time, I’m long on the semiconductor. We saw a 43% gain in the Nasdaq this year, with many of the tech companies having massive gains as well, which is what $MU saw. Micron was up 70.92% from their March lows, hitting a price point of $71.92. In comparison to the three major indexes, Micron beat both the $DJI and the $SPX in return percentages this year, with $MU posting a +33.73% return this year, the $DJI posted a +6.56% return this year, and the $SPX posted a larger return, at +15.52%. The only major index to beat $MU this year, in terms of YTD returns, was the Nasdaq, $IXIC. The $IXIC posted a +43.44% return this year, +9.71% higher than $MU. As we can see here, Micron has in fact done quite well this year in comparison to the major indexes, but let's take a look at some of their metrics. With a market capitalization of more than $80 billion, we want to see a number anywhere higher than $700 million. Looking at the EPS, there are some things we must understand regarding its growth. Micron had always had issues with supply, as their supply was too large, but has since fixed those problems. The past few years, earnings have decreased due to those supply issues. Beginning in 2018, going from Q1-Q4 with these numerical values, earnings grew at +246.75%, +121.43%, +70.67%, and +28.31%. Due to supply issues that continued into 2020, the company reported massive losses in earnings, not reporting earnings from Q3-Q4 of 2019. Yet, the earnings losses didn’t hinder them much as the company posted exponentially higher gains in ‘18. The company saw larger earnings gains in Q3 of 2020, as the supply issues that had been nagging the company diminished. Earnings grew at 61.11% in Q3 of ‘20, and the diluted EPS for Q4 was $1.08, higher than Q3 by 0.26, and higher than Q4 ‘19, by 0.52. In terms of earnings, while experiencing a few hiccups during the process, they have shown solid growth, and the outlook seen in the Q4 report shows that demand for these products will continue to increase. “Smartphone, auto, and consumer end markets have started to recover, and we see further demand improvements ahead. Cloud and laptop demand continues to be healthy, supported by the work from home and shop from home trends; gaming demand is robust. Short-term outlook has weakened; enterprise demand weakened due to lower IT spending and somewhat higher inventories at some customers. Halted shipments to Huawei on Sept 14; expect to offset impact by end of FQ2-21”(Micron Earnings Call). As we’ve seen this year, the demand for DRAM and NAND, which are Micron’s largest products in terms of percentage of revenue, the demand is strong. With new gaming consoles on the market now as well, I suspect the demand to continue to increase at this rate. One of the most imperative metrics to follow along with while viewing a company’s financials is ROE, return on equity. Micron posted a ROE of 7.18%, which is lower than many other companies within the Nasdaq, and lower than it typically has been. Though ROE was down, equity itself has been higher than usual, at $39 billion. I believe from looking at their equities posted throughout the last 3 years, as well as the ROE and income, we can see the ROE levels return to the levels of which it was at in 2018, maybe even higher with aggregate equity being as high as it is. Myn final metric I enjoy using is target price. Target price is a metric that is heavily criticized and scrutinized yet it has proven successful. My target price for $MU in 2021 is $218.06. Many may assume the price is way too high, but there is a formula. Formula for target Price: Current per share price (Current P/E ratio/Forward P/E ratio).
Image: FRED Graph... $MU is part of the Nasdaq
The second stock I will outline for the year is JP Morgan and Chase. $JPM is currently trading at $125.36 per share, which is a bit below their 52 week high. Bank stocks have been hit hard this year, with interest rates going close to zero, and bank loans, business loans, being less than they’ve been in years. The bank lost -9.38% this year, which is not much compared to how much they could have lost in the first place. With a current P/E ratio below 20, at 16.31 and an EPS of 7.6, this stock is extremely enticing. Their ROE for the year ended is at 9.48%, and a ROA of 0.8%, these are problem numbers. I’d like to see these higher, in regards to the aggregate price of the stock. Historically, the bank’s EPS has been increasing since 2018, with the exception of Q2 and Q3 which would have been expected. If we measure the YOY gains of EPS, the numbers are considerably lower than what they once were. The year over year gain a year ago today was $10.72, where that same metric is currently $7.62. From a quarterly perspective, the recent quarters EPS was much higher than the previous one by $1.54, at an EPS of $2.92. This gain seems to be increasing more than they’d expect at this point, thus I’d suspect the stock will see a substantial gain for the new year. Banks also have been implementing a buyback system, where they are buying back their shares which are out in the secondary market. The Fed is implementing this for the largest banks in the country. This is a good sign for the economy. The target price for said company will be 151.6. This is taking into consideration the forward P/E ratio, the next 12 months, and the current P/E ratio.
Image: FRED Graph
The final stock I would like to recommend is Norweigan Cruise Line. $NCLH, and the aggregate cruise line industry, was perhaps the hardest hit industry from the coronavirus. The stock is down -55.49% YTD, with each major index beating it, obviously. This is a company you MUST be long on in order to make a profit which is worth the risk. Investing in an industry that legitimately is hemorrhaging money each day, with every single vessel they own docked in a port not sailing is perhaps the worst idea for investors. It’s one of those stocks where if you own it, and news breaks regarding a new COVID development, you’ll immediately drive to your local brewery and purchase a 6, or if you’re lucky enough to find a 12, pack of said brewery’s finest IPA and drink the entire thing to end the day.
Image: FRED Graphs
Now, this may seem like a terrible investment from reading that initial paragraph, but this is the paragraph where the good news is located. Everyone loves cruises. It’s one of the most desired vacation plans to return to once the virus has ended. I believe, along with many others, that there is a significant amount of pent up demand for this industry, that once the cruise lines are free to sail again, it will boom, and in a bigger way than ever before. Prior to the virus hitting the US, $NCLH was trading at $55-$59 per share, and is currently trading at $25.64 per share. This may seem like an awful investment, as most stocks have retained their 52 week highs, or surpassed them by now, while $NCLH is still down more than half of its initial per share value, yet let's take a look at them throughout the past few months rather than YTD. In the last 6 months, the stock is up +53.53%. Within those last 6 months, the stock has outperformed all three indexes.