One thing I don’t like to do is chase trends. It is a pet peeve of mine to buy what the masses are buying. I found that more often than not we’d be doomed to trail. At best the results would be mediocre. The best outcomes usually come from diligent homework and looking ahead where others are not yet focusing. Ideally, we’d want to set a trend not follow it. Today, we discuss trading three stocks for 2021.
The point is to find opportunities now that are still hidden from the others. That gives us a head start because we would be ahead of the chase. Ideally we’d want the herd to catch on later and follow us into it. At which time the profits will materialize in droves. Taking such chances also may result in big whiffs so proper risk management is important.
I consider today’s three theses somewhat speculative. Therefore, conviction should be moderate. While the logic is viable, there is no immediate tangible trigger to go long here. Besides, logical or not, nobody accused Wall Street of being perfectly wise. They are an unpredictable bunch, especially in 2020. Since I’d rather be safe than sorry, I have to temper my enthusiasm and leave room for error. A good first step is to keep the size at levels that don’t break my bank or my heart.
The three stocks for 2021 are in the news now and I bet they will continue to be so for months. They are:
Best Stocks for 2021: Nikola (NKLA)
Nikola was a special purpose acquisition company (SPAC) that burst onto the scene with massive fanfare. The rally was immense and violent. In a manner of days, the stock rallied 500%. Investors bought it with panic and FOMO, leaving a trail of bloodied bears. When I first saw the company spokesperson Trevor Milton in an interview I disliked him a bunch. My first impression was that he was more proud of his stock than his company. Then I thought I was the odd man out, so I overcame my skepticism.
I guess I should have stuck to my initial gut. He has now left the company and with a potential misconduct case against him too boot. Needless to say the stock experienced excessive hate and plummeted 70% in under two weeks. Today, my contention is that this is an opportunity to get long NKLA stock into next year.
It goes against the grain of what the so-called experts are opining in the media. Hate has hit extreme levels, so the theory here is that we have run out of incremental sellers. If that’s true, then the upside potential becomes the more likely outcome. General Motors (NYSE:GM) has recently announced an alliance with Nikola. The new CEO kept the hopes alive about that deal and others. Confirmation or updates on those fronts, especially the GM one, are potential catalysts.
From near $20 per share the target could be a double within six months. Where it bounced this week was a level that was the absolute perfect top in March. It again served as the perfect base for the mega-breakout in May. This was not a coincidence. Machines are doing most of the trading and they know which pivot levels matter most. As long as the stock is above $16 per share, then my thesis is alive. The options market allows for cheap ways of putting this strategy in action with limited risk. This is definitely a “buy and hope” trade, and every portfolio needs some of those.
Although Tesla is closely related to Nikola, it is most definitely not in the same boat. Elon Musk has turned his ship around beyond most expectations. My bet today is that it will continue to raise eyebrows next year and in a good way. The situation there went from life support last year to extreme success now. The crazy part is that TSLA stock powered through the novel coronavirus pandemic. Somehow Tesla went from inches from collapse to having one of the best balance sheets on Wall Street.
The basis of the bullish thesis is that Tesla is not a car company. The fans argue that it’s either an energy or a technology company. If that’s true, then the company is overdue in starting to talk up the other points. So far all the headlines are almost entirely about car production, targets or deadlines. Therein lies the bulk of the opportunity I want to capture.
There is a real possibility that by early next year they start broaching topics on their other income streams. When that happens, the bear case takes a beating. Because finally there would be proof of the concept that it’s not just a car company. I bet that a large number of skeptics would opt to cover their positions. This year, TSLA stock has astonished investors and I expect this to continue into next year. If I am wrong, then it continues to plunk along the status quo. Being up 780% in 12 months is a good place to be. That’s an investment worth holding regardless of my thesis.
Canopy Growth (CGC)
A few years ago, pot stocks were all the rage, not EVs. Canopy Growth was the face of that bunch much like Tesla is to EVs now. Mainstream investors gobbled up the cannabis stocks like there was no tomorrow. Now it’s a different story as CGC stock is down 40% in a year and it’s a sector-wide scenario. After having extreme hopium in the beginning stages in 2018, sentiment swung to the other extreme. Pot stocks hardly get any attention in the news unless it’s disasters.
It’s almost the same thesis as NKLA … CGC stock is so bad that it’s good. But there are also technical reasons to think that. CGC has become the proxy trade on cannabis stocks. It has the best balance sheet, so it is fit to navigate the many extra hurdles that the industry has. This is still an illegal activity in many U.S. states. Yet the stocks are still trying to rally. It recently fell hard on a sympathy move with Aurora Cannabis (NYSE:ACB). If left alone, Canopy Growth will find footing and recover.
Technically, $15 per share was important to hold, so now it’s a challenge on the way back up. Regardless, the evidence on the chart suggests that CGC stock has held reasonably well through the pandemic. It has had two bounces since the lows, so I bet it holds one more time. If I’m correct, then the bulls have the opportunity to swing higher into year end. My thesis today is not only to capture that move, but also to speculate on next year’s headlines. The election might open the door for the legalization talks at the Federal level. That rhetoric alone would be a massive catalyst for the whole sector. Sometimes a little bit of hopium is what a stock needs.
In addition to our arguments today, we have to pay attention to the macroeconomic conditions. Reports show that we are in a recovery from the pandemic crash. Everything points in the right direction, but then there are the uncertainties that the U.S. elections brings. The first presidential debate this week demonstrated it will not be a quiet one. In fact, we probably won’t know the outcome of the contest until weeks after the fact. Equity investors do not like such potential trepidation, so they will be quick to sell on headlines. Luckily the companies I picked today as being among the best stocks for 2021 are speculative; therefore, they will not necessarily follow the market-wide direction.
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.