The 10 best stocks to buy for 2021
The year 2020 will go down as one of the more unpleasant and challenging 12-month periods in modern global history. Through November, there were 10.7 million people unemployed in the U.S., up nearly 5 million from the record-low unemployment rates seen in February; millions more have stopped looking for a job altogether. In 2021, the fate of the economy — and the stock market — will likely revolve around the pace and effectiveness of factors like vaccine rollouts for COVID-19 along with fiscal stimulus and government assistance programs. And of course, all this comes with a new White House administration running the show. As nations race to reach the coveted post-pandemic phase, themes like technology, penny pinching, entertainment and personal health run through the best stocks to buy for 2021.
Adobe (ticker: ADBE)
Adobe is “best in class” in its industry by a country mile. Its grip on the lucrative creative software market has only grown with time, and entering 2021, access to one of its many products is essentially a required cost of doing business in areas like online publishing, film, photography, digital advertising, graphic design and digital documents. Adobe has the highest gross margin among the 10 best stocks to buy for 2021 at 86% and boasts the second-highest net profit margin at more than 31%. Adobe set record after record in 2020 in areas like revenue and cash flows from operations as its years of double-digit revenue and earnings growth continued. The cloud-based software-as-a-service model ensures ADBE will reap high-margin recurring revenue from its dominance well into the foreseeable future.
Spotify Technology (SPOT)
It’s fair to say that Spotify is the only company on this list that’s not yet consistently profitable, so more conservative investors should consider the risks on that front before investing. Analysts currently think the company may take until 2022 or 2023 to break into the black. In the meantime, SPOT is growing in popularity aggressively; monthly active users (MAUs) jumped 29% year over year to 320 million last quarter, while the number of premium subscribers rose 27% to 144 million. The company has successfully turned digital music into a social experience through shared playlists, and its investment in the future of podcasts became apparent in 2020 with an original podcast from former first lady Michelle Obama and the signing of podcast giant Joe Rogan to an exclusive multiyear $100 million licensing deal that could bring in millions of additional subscribers.
BJ’s Wholesale Club (BJ)
Discount retailers tend to do well in times of hardship, and a global pandemic-induced recession certainly qualifies for a hard times badge. Despite rallying about 70% year to date through early December, the $5 billion warehouse bulk retailer still looks like a steal. The company’s most prominent public competitor is Costco Wholesale (COST), which is more than 30 times the size of BJ’s. That alone should indicate the size of the market; not only can BJ’s more rapidly expand its store count — BJ’s has 219 locations to Costco’s 803 — but it’s growing same-store sales more quickly. Last quarter, comparable sales rose 18.5% year over year at BJ’s versus 16% for Costco. Digitally enabled sales helped on that front, soaring around 200% year over year. At the same time, BJ’s trades for just 14.5 times earnings, or about one-third the price-earnings ratio of about 42 for Costco shares.
The Walt Disney Co. (DIS)
Technically one of only two names among the best stocks to buy for 2021 that’s not profitable (after Spotify), there’s no need to worry about the long-term moneymaking potential of the House of Mouse. To consider Disney’s valuation, think of Disney+ in isolation for a moment. Netflix (NFLX) is the largest stand-alone streaming service in the world — it’s worth about $225 billion and has built up about 200 million subscribers worldwide since its 1997 launch. Disney+, on the other hand, has only existed since November 2019 — and it already has nearly 75 million subscribers globally. Disney, which is worth about $279 billion, also has its studio entertainment, media networks, and parks, experiences and products segments to boot. Analysts expect Disney’s parks and cruises to hit operating income but for its burgeoning streaming platform to become more and more material. In short, DIS is a high-quality blue-chip stock at a good value.
It’s more or less tradition now to include Facebook among the annual list of U.S. News’ 10 best stocks to buy. 2021 will be Facebook’s fifth straight year on the list, with shares up 172% since first being named in 2017; for comparison, the S&P 500 is up 85% over the same period. FB is a singular company due to its unprecedented scale and user engagement — its Facebook platform alone has 2.74 billion MAUs as of Sept. 30, while monthly active people on its family of apps, which also includes Instagram, WhatsApp and Messenger, is at 3.21 billion. Facebook barely edges out Adobe as the stock on this list with the highest net profit margin at 32%, and opportunities to boost monetization through e-commerce (Facebook Shops, Facebook Marketplace), Facebook Dating and other areas, like virtual reality (Oculus), offer several long-term growth drivers.
Alibaba Group (BABA)
Alibaba, like Facebook, is a returning pick from last year’s best stocks to buy list. BABA is both massive — it’s worth more than $725 billion — and growing rapidly (sales rose about 30% last quarter). Investors now also have a case study in how the business handles sudden shocks to the marketplace. In a year that saw a pandemic emerge, spread and shut down day-to-day life in much of China, Alibaba kept growing, and its stock is up about 25% year to date. Although it’s most notable for being Asia’s preeminent e-commerce giant, its cloud computing division now accounts for 10% of overall sales and enjoyed revenue growth of 60% last quarter. At 21 times forward earnings, BABA stock still trades more cheaply than most large-cap growth stocks. U.S. investors should have some exposure to Chinese companies, and Alibaba is arguably the single safest bet.
Lowe’s Cos. (LOW)
Lowe’s takes the cake over its larger rival Home Depot (HD) for a few simple reasons: its size leaves more room for growth, and analysts expect higher growth over the next five years to boot. Home improvement retailers stand to continue a solid 2020 run into 2021 as the pandemic incentivizes homeowners to remodel and improve the houses they are spending more and more time in. Analysts are calling for compound earnings growth of more than 20% over the next five years, an incredible pace of growth, particularly for a company trading at just more than 21 times earnings — roughly half the 41 times earnings the broader S&P 500 trades for today.
Workout equipment manufacturer Nautilus is far and away the smallest company among the best stocks to buy for 2021, with a market cap of around $530 million. But again, when compared to more richly valued competitors, investors should realize Nautilus’ small size and conservative valuation represent a real opportunity. Nautilus manufactures under its eponymous brand of workout equipment, as well as the Bowflex, Schwinn and Universal brands. While perhaps not as sexy as the $34 billion Peloton Interactive (PTON), NLS trades for 10.7 times forward earnings and 1.2 times sales, a steep discount to the 168 times forward earnings and 14.7 times sales of PTON stock. Importantly, Nautilus is also getting into the lucrative subscription workout business, charging $19.99 per month for its basic online membership that includes virtual coaching and trainer-led videos on its bikes. NLS is practically custom-made for the stay-at-home economy.
Sonos is a consumer electronics company focused on wireless audio technology and the smart home. It directly relates to two other picks on this list, Spotify and Lowe’s, by tripling down on the expectation that home improvement and home entertainment have become increasingly important to consumers. Sonos, with a $2.4 billion market cap, stands to benefit from a continued boom in demand for home entertainment systems as the outlook for movie theaters is still morose entering 2021. Trading at 32 times forward earnings, SONO stock is coming off a strong quarterly revenue and earnings beat in November. Sonos demand should have more than just one quarter’s worth of runway, however, and the company could even be an acquisition target for companies like Alphabet (GOOG, GOOGL), Amazon.com (AMZN) and Apple (AAPL), which are fighting for ground in the connected home market and the Internet of Things.
Newmont Corp. (NEM)
Last among the best stocks to buy for 2021 is Newmont Corp., the third member of this list that is also a repeat pick from 2020. The gold, copper and silver miner is an excellent hedge should 2021 turn out to be another rough year for the global economy, as gold especially tends to perform well as a safe-haven asset during recessions. Although shares rallied in 2020, NEM still looks attractively valued, with a P/E around 21 and five-year earnings growth expected to exceed 36% annually. Newmont currently has a 2.6% dividend yield and will have repurchased $2.5 billion in stock throughout 2019 and 2020 when the year comes to a close. Newmont expects its all-in cost for mining an ounce of gold will be $970 in 2021, so it would take a steep plunge from gold’s $1,800 to $2,000 levels to turn NEM unprofitable.
The best stocks to buy for 2021:
— Adobe (ADBE)
— Spotify Technology (SPOT)
— BJ’s Wholesale Club (BJ)
— The Walt Disney Co. (DIS)
— Facebook (FB)
— Alibaba Group (BABA)
— Lowe’s Cos. (LOW)
— Nautilus (NLS)
— Sonos (SONO)
— Newmont Corp. (NEM)