Can investors still find good growth stocks to buy for 2021? With U.S. stocks regaining their all-time highs, investors are starting to worry if it’s too late to jump in. And for a good reason: even with multiple Coronavirus vaccine candidates rolling out, 2021 promises to be another rollercoaster year.
Some sectors have seen their bloated valuations rise even higher this year. Struggling companies like Workhorse (NASDAQ:WKHS), Sunrun (NASDAQ:RUN) and FuelCell (NASDAQ:FCEL) have seen their share prices balloon by virtue of being involved with alternative energy. Even Nike (NYSE:NKE) has seen its valuation shoot up from its 10-year average of 14x EV-to-EBITDA to 47x today.
Unaware investors could get wiped out if these lofty valuations come crashing down in 2021.
So, how can growth investors keep the door open for gains while protecting their portfolios? Simple. Buy companies that have both.
- Safety factor: have a strong “evergreen” business that can sustain long-term returns; and
- Growth factor: have a catalyst for super-normal growth in 2021.
Here are 7 safe growth stocks to buy:
- Lyft (NASDAQ:LYFT)
- Pfizer (NYSE:PFE)
- Fox (NASDAQ:FOXA, NASDAQ:FOXB)
- Ericsson (NASDAQ:ERIC)
- General Electric (NYSE:GE)
- Sturm Ruger (NYSE:RGR)
- Alibaba (NYSE:BABA)
Let’s take a look.
Safe Growth Stocks to Buy for 2021: Lyft (LYFT)
- Safety factor: Proposition 22, wide-moat business
- Growth factor: Coronavirus vaccine
When Californians went to the polls for the 2020 election, they also voted on a critical ballot measure: Proposition 22. The measure, which passed by a wide margin, created a new category of “gig workers” who can receive healthcare and insurance benefits while maintaining their freelance contractor designation.
Lyft stock soared on the news. For months, the threat of legal shutdowns hung over the ride-hailing company. And while California’s new law doesn’t shut the door for challenges from other state courts, it sets a clear precedent to move forward.
The news comes at a pivotal moment for Lyft. The coronavirus pandemic had cut deeply into Lyft’s business, sending shares down 50% through October. With multiple coronavirus vaccine candidates now coming into the picture, Lyft will need to carefully transition back to “business-as-usual.” Having a way to provide drivers with healthcare and insurance will be a critical step.
Lyft’s “safety” factor comes from its wide-moat business — ride-hailing apps rely on network effects, giving first moving companies a massive advantage. The more people use an app, the more drivers will join, making the network even more robust.
- Safety factor: Diversified mix of smaller drugs
- Growth factor: Coronavirus vaccine, oncology drug pipeline
For years, investors have given Pfizer the cold shoulder. The company’s blockbuster drugs — including Viagra, Lyrica and Lipitor — were all due to go off-patent by 2020. Many more will fall off the “patent cliff” between 2025-2029.
And then came the coronavirus.
As one of the earliest companies to produce a coronavirus vaccine candidate, Pfizer has finally found an “ace-in-the-hole” to offset its aging portfolio. The company already has a 100 million dose contract with the U.S. government and another 200 million doses for the European Union. Both have options to buy millions more.
There’s also another reason to buy Pfizer: despite some big-name patent expirations, the drug-maker has been building a portfolio of lesser-known drugs. For example, in cancer treatment, the company now has over twenty approved oncology drugs. Another 14 approvals could happen through 2025 in that space alone.
That makes Pfizer a compelling “safe” stock for 2021 with an option for growth from its coronavirus vaccine. The company trades at a P/E ratio of 24x, compared to rivals Novartis at 26x and Gilead at 63x.
Fox (FOXA, FOXB)
- Safety factor: Local news stations, cheap valuation
- Growth factor: Partisan politics in 2021
Even with partisan politics at an all-time high, both Republicans and Democrats can agree on one 2020 election winner: Fox News.
When media mogul Rupert Murdoch spun off his empire’s crown jewel in 2017, few knew what lay ahead for the newly independent company.
Fast forward to today, and Fox News has shattered cable news rating records. Its primetime viewers hit 4.9 million in October, compared to MSNBC at 2.7 million and CNN with 2.4 million. And its top three shows, “Tucker Carlson Tonight,” “Hannity,” and “The Five,” beat every other cable news network show. Revenue per share has jumped from $14.3 in 2016 to over $20 today, sending EBITDA up 42%.
Fox might not be for everyone. Those who disagree with Fox News’ role in politics might turn away, regardless of how good an investment opportunity the company presents. And even Trump supporters might balk at the network’s willingness to distance itself from the former president once 2020 election results came in.
But those looking for good growth stocks to buy should still consider Fox: a diversified media company that includes news, sports, 29 broadcast stations, and a TV/film production service company. And even more important? The company’s EV-to-EBITDA sits at just 7x (compared to its average of 10x), making it one of the cheapest “safe” stocks on this list.
- Safety factor: Primary European telecom maker
- Growth factor: 5G rollout
In the global race to install 5G capacity, one company has stood above the rest: Ericsson.
This Swedish multinational, founded in 1876 by Lars Magnus Ericsson, started as a telegraph repair shop. It’s since quietly grown to become the world’s third-largest maker of telecom equipment from its humble beginnings.
And then came the 5G revolution.
To reduce global dependence on Chinese-made 5G gear, the U.S. government has aggressively lobbied foreign countries to ban Huawei, the largest Chinese telecom equipment maker. As the most technologically advanced non-Chinese maker of 5G equipment, Ericsson has been a clear beneficiary.
For years, Huawei and its Chinese counterpart ZTE (OTCMKTS: ZTCOY) have allegedly price-dumped telecommunications kit abroad, crimping financial returns at Ericsson since 2000. Under a Biden administration, the U.S. looks set to continue its “tough-on-China” stance, paving the way for Ericsson to return to greater profitability.
What about Ericsson’s rival, Nokia (NYSE:NOK)? The company will also win from 5G, but it lags Ericsson. “It misjudged the start of the 5G investment cycle and was both late with its own products,” Financial Times reports, “and is still caught up in finishing the integration of its Alcatel-Lucent acquisition.”
That leaves Ericsson in the top position to sell its more advanced 5G gear.
General Electric (GE)
- Safety factor: Cheap valuation, medical imaging duopoly
- Growth factor: Return to air travel in 2021/2022
After suffering through a terrible year, General Electric shares now look blindingly cheap even after its recent run-up.
The coronavirus pandemic hit GE with a temporary “one-two” punch in all business lines. Demand for its lucrative jet engine business collapsed when airlines cut their fleets in March. Its medical imaging and power generation units also suffered, though less obviously, as customers delayed significant capital expenditures. Short-term investors looked at GE’s bottom line and got out immediately, sending shares down 23% since February.
But in truth, analysts estimate that GE’s EBITDA will exceed last year’s levels in 2022 as consolidation in the jet engine industry starts to pay off. That puts the company’s share at just 7x EV-to-EBITDA, compared to its long-term average of 15x.
Under turnaround CEO Larry Culp’s leadership, the company has also sold off its less profitable segments. In May, the company sold even its lightbulb business, marking the end of a 129-year run.
The leaner company now has a duopoly in medical imaging, an oligopoly in jet engines and a healthy lead in renewable and conventional electricity-generating turbines. These factors now make GE finally one of the great growth stocks to buy.
Sturm Ruger (RGR)
- Safety factor: Zero debt, cheap valuation
- Growth factor: Firearm restocking under a non-Trump presidency
Shares in America’s most profitable firearms company look primed to rise as we head into 2021.
Gun stocks have flatlined over the past four years as investors turned away from firearm and ammunition companies. Stockpiling from the Obama years largely disappeared during Trump’s presidential tenure, sending companies like Remington into bankruptcy.
Sturm Ruger, on the other hand, has played its cards far more conservatively. The company typically holds zero debt and has a comparatively lean corporate structure. These cost savings have allowed Ruger to out-earn rival Smith & Wesson (NASDAQ:SWBI) despite selling firearms at lower gross margins. In Q3, RGR noted its highest net income margin since 2013.
These opposing forces have meant that RGR has become one of the least expensive high-quality stocks I track. EV-to-EBITDA sits at just 8.2x and its PE ratio is just 16.3x.
Sturm Ruger isn’t for every investor. The company focuses on producing firearms, which many people will object to on moral grounds. The company has also faced multiple lawsuits over the misuse of its guns. However, RGR has largely shielded itself from lawsuits by selling only to firearm distributors rather than directly to consumers. (Smith & Wesson, on the other hand, has a direct sales team).
And 2021 looks to be a banner year for RGR stock. The NICS Firearm Background check, often used as a proxy for firearm sales, reported 38% more background checks done last month than in the same period the previous year.
With a Democrat set to become the next president, firearm sales look set to jump. Local news stations have already started reporting shortages of firearms and ammunition in stores. The 2021 firearm shortage is just beginning.
- Safety factor: Largest eCommerce company in China
- Growth factor: Fast 2021 growth, Ant IPO
This month, Chinese regulators stepped in to delay the long-anticipated IPO of Ant Financial, China’s largest mobile payments processing company. Alibaba, which owns 33% of that company, saw its shares sink 10%. The temporary dip provides an ideal entry point into BABA stock.
Why did BABA shares sink so far? With Ant Financial’s IPO delay, investors have started to worry about a broader government crackdown on the nation’s tech giants. It’s one of the few areas where the Chinese government has taken an unusually hands-off approach.
In truth, regulators are looking for these non-state businesses to toe the Communist Party line, a warning that Jack Ma has famously ignored. With Mr. Ma’s lieutenants now running the show, investors should expect Alibaba to regain its good graces with the government.
“Striking a more conciliatory tone, [Alibaba CEO] Zhang said on Monday that he welcomes more regulation,” CNN reported. Mr. Zhang also “noted that China’s digital economy has thus far been able to develop and innovate rapidly thanks to government policies.” And that means BABA looks like one of several safe growth stocks to buy for 2021. Alibaba and Amazon trade at similar EV-to-EBITDA multiples, yet analysts expect Alibaba to grow faster in 2021: 37% versus Amazon’s 18%.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.