With two approved vaccines being administered as we speak, and many, many more vaccines in the pipeline, the light at the end of the dark COVID-19 tunnel is getting brighter every day.
Now, you don’t need a crystal ball to be able to see that two of the biggest market stories of 2021 will be the economic recovery from the pandemic and the continuing rally in equities.
Signs are looking good that the president will sign off on a bipartisan stimulus any day now.
That gives us some breathing room to turn our attention to the year ahead of us, and four stocks that I think will give you slam dunk after slam dunk next year – just terrific outperformers – as normalcy slowly returns and the recovery picks up even more steam. These are buy-and-hold stocks; they offer value, growth, and safety, but you know me: I’ll be sharing trades you can use with these to really boost those 2021 returns…
Recovery Play No. 1: EVR
Evercore Inc. (NYSE: EVR) is a great place for me to start off, because it’s like a pure play on the bullish stock market itself.
The soaring market has generated hundreds of billions in new wealth in 2021, even for regular investors, and all that money needs banking. Evercore is just the kind of independent investment banking advisory and wealth management firm that fits the bill.
It’s a screaming value right now, with a P/E ratio of 15.38 – less than half of Apple Inc. (NASDSAQ: AAPL) or Amazon.com Inc. (NASDAQ: AMZN). It’s trading for around 26% below its estimate of fair value, and management’s paying a 2.8% dividend. Conservative estimates forecast 28.52% earnings growth in 2021, as money pours into the market.
From a technical standpoint, EVR shares look even better:
It’s been strong since an expected post-earnings dip, to the point where it’s just off all-time highs. Its “traders’ trendlines” – its 10- and 30-day moving averages – crossed each other back when this stock was trading in the $60 range. They’ve been widening ever since; you could drive a train through the gap between its MA10 and MA30, frankly.
So we’ve got great fundamentals and great technicals in Evercore. Bloomberg is expecting shareholders to reap more than 22% over the course of 2021, but you can juice those gains a few different ways; you can always sell an EVR Jan. 15 2021 $110 put or, more conservatively, put on a call spread where move one or two strikes out of the money and buy a lower-strike call and sell one with a higher strike, all expiring on the same day.
Recovery Play No. 2: KBH
KB Home (NYSE: KBH) is a great play on the most unlikely U.S. housing boom in history, driven by the growing wealth and home equity of the upper middle and upper class in America. This homebuilder is a no-brainer for 2021, as housing starts and builder confidence remain high (and mortgage rates remain low).
Now, an investor today could probably throw a dart at a list of homebuilding stocks and end up doing OK over the next six to 12 months, but KB Home stands out for a couple of reasons, not the least of which is its “cheap” price/earnings ratio; at 10.3, it’s nearly a quarter of that of the entire U.S. stock market, while earnings are growing at around 20% a year.
Even its relatively high debt load isn’t enough to scare me off with money as cheap as it is right now. Homebuilding in general has fairly high debt right now as these companies are scrambling to keep up with demand and tapping credit lines.
Besides, there’s nothing scary in the technical picture, which looks like a classic value play right now. It had a big drop in mid-November when, oddly enough, vaccines started to hit headlines, but that’s just folks selling the news.
This stock makes a great long-term call play. You could go just down the road to Jan. 15, with a KB Jan. 15 $30 call – just be prepared to possibly have some shares called away – but the fundamentals and technicals here point to some decent LEAPs plays, with calls expiring as late as January 2022 or 2023 – a good choice if you think this housing boom has staying power.
Recovery Play No. 3: MDC
MDC Holdings Inc. (NYSE: MDC) is also in the homebuilding business, courtesy of its subsidiary Richmond American – one of the top 15 homebuilders in America. MDC’s biggest business, though, is mortgage financing, and, as we’ve seen…. what a time to be in that business! Fannie Mae says that mortgage lending is set to hit an all-time high in 2020 – nearly $4 trillion. Refinancing has probably already hit $2.4 trillion this year, and there’s every sign that 2021 could be even better.
Here’s how to get a piece for, basically, pennies on the dollar.
MDC is trading for half of its estimated fair value, and just like some of the other companies we’ve looked at today, earnings are expected to grow in the 20% range in 2021. And you want to talk about cheap? MDC’s P/E ratio is slightly over 10.0, and EPS is coming in at 4.79.
Its technical picture looks a bit stronger even than that of its sector-mate, KB Homes, because its lows are further back in the past, and it’s well above its MA10 and MA30, too.
I think selling an MDC Jan. 15 2021 $50 put makes sense here, or, again, if you want to be more conservative, you could construct a spread where you buy an MDC Jan. 15 2021 $55 call and sell an MDC Jan. 15 2021 $60 call and pocket the difference; you cap your potential gains, but also slash your risk.
Recovery Play No. 4: THO
Thor Industries Inc. (NYSE: THO) is, essentially, a play on the return of travel – something I think we’re all looking forward to in 2021. Thor makes recreational vehicles (RVs). Now, my Winnebago is one of my prized possessions; I even set it up as a mobile trading room this past summer.
But Thor makes some classic American brands like Airstream, Heartland RV, and JayCo, just to name a few. Take a trip on the interstate during any summer day, and you’ll see dozens of these beauties. RVs are enjoying a pandemic boom, too.
When Americans start taking more trips again, and spending some of the savings and stock profits they’ve accumulated, money will flow into companies like Thor, and its current $98 share price will be in the rearview mirror. Thor’s price/earnings ratio is a not-too-high 20.1, which is 20% below its estimated fair value; its estimated earnings per share come in at 6.74, and it’s grown its dividend nearly 8% over the past five years. Earnings growth is happening at around 30% a year.
At the risk of sounding like a broken record, Thor also carries a high debt load, but like with KB and MDC, it’s doing it for sound business reasons, to try and meet demand.
The chart is arguably the worst-looking of the four, which, far from being a bad thing, makes this a total value play for 2021. It’s bounced back off its lows, but there’s much more room to run.
You could sell a THO Jan. 15 2021 $100 put for $7 today, which would obligate you to buy the stock at $100 and, because it’s on its way to $105 by mid-January, makes this the way to go. I’ll buy a $105 value stock for $100 all day!
Bull market aside, there’s a lot to be excited about in 2021; the vaccine, maybe the chance to go to an actual football or baseball game with some fellow fans. Restaurants could open up – dinner and a movie sounds great right about now. I hope you’ll do something fun with your “four-cast” profits as soon as it’s safe!
— Tom Gentile
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Source: Money Morning