Retail traders are already turning their attention to the best investments to start 2021. Undoubtedly, it’s a daunting task. The past year was an unprecedented one in every sense of the word.
Despite the novel coronavirus pandemic, stock markets had a respectable 2020. In fact, Covid-19 has served as a tailwind for several sectors like entertainment, pharmaceutical and medical devices, logistics, and biotech.
Electric vehicle (EV) stocks and high-risk SPAC plays became the flavor of the season, as investors turned to nontraditional areas to park their capital. All of this led to a stock market rally that defied expectations.
While the economy is still way off pre-pandemic strength, the Dow Jones Industrial Average and the S&P 500 started and ended this unprecedented year at all-time highs. On the final trading day of the year, the Dow closed 0.7%, or 197 points, higher, and the broader S&P 500 jumped 0.6%. Although not every company and sector is doing well. That’s why you need a solid strategy to pick the best investments to start 2021.
This list provides you with five names with a ten-year record of profitability and an ROE of more than 15%. The five-year revenue growth rate (per share) is above 5%. None of the constituents has an operating margin percentage of less than 20. All are listed on major U.S. exchanges. They have a 5-year revenue growth rate (per share) and a 5-year EPS growth rate of over 5% and 10%, respectively.
Without further ado, here are the best investments to start 2021:
Best Investments to Start 2021: Alphabet (GOOG,GOOGL)
We start this list with a tech bellwether. Google’s parent company became the third tech company to reach a $1 trillion market capitalization in 2020. Relative to the S&P 500 baseline, GOOGL has outperformed the S&P 500 by 21.2% in the past five years. One would think that there is little upside left to exploit. But this is Google we are talking about.
As a valued member of the FAANG stocks — the five most popular and best-performing American technology companies: Facebook (NASDAQ:FB), Alphabet, Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), and Netflix (NASDAQ:NFLX) — shares of the tech juggernaut are the safest bet in a volatile market.
Alphabet’s share-price target was raised to $2,000 from $1,725 by Colin Sebastian, an analyst at Robert W. Baird & Co., citing “strong” e-commerce trends through much of the holiday shopping season and digital-advertising visibility improving throughout 2021. That isn’t far from the 12-month consensus price target of $1,920 per share. The bull case estimate is $2,250 a pop.
Out of the last 12 quarters, the company has beat analyst estimates nine times. This is despite Wall Street setting stiff targets. It’s a testament to Google’s consistent performance. Despite shares trading at 30.58 times forward price-to-earnings, GOOGL stock is a worthwhile investment considering its monopolistic position in search.
Alphabet has never paid out any cash distribution to shareholders. However, share repurchases are a large part of the company’s strategy. Google allocated $18 billion to buying back its shares over 2019. Despite the pandemic, Alphabet’s board authorized the company to repurchase up to $28 billion of its Class C shares in its second quarter.
I recommend reading Dana Blankenhorn’s article on Google. It will help you develop a well-rounded understanding of where the company is at the moment. He raises pertinent points regarding complacency in the company’s management and how it can affect its long term future. Despite the positives associated with the tech giant, one should keep these factors in mind when investing in the stock.
Intel surged as much as 8% on Tuesday, Dec. 29, 2020, after the chipmaker received a letter from the activist hedge fund, Third Point urged it to explore strategic alternatives. It halted a period of substantial decline for the American multinational semiconductor company, which has been losing market share to Advanced Micro Devices (NASDAQ:AMD).
Third Point, run by billionaire investor Daniel Loeb, has a $1 billion stake in Intel. According to Loeb, Intel has lost its pole position in microprocessor manufacturing to Taiwan Semiconductor (NYSE:TSM) and Samsung (OTCMKTS:SSNLF). Customers like Apple (NASDAQ:AAPL) are looking to manufacture chips in-house or outsource to East Asia.
These are legitimate concerns. And it makes sense the markets are reflecting this sentiment. But investors shouldn’t forget Intel is a consistent performer with a powerful brand name. Out of the last 12 quarters, it has reported analyst beats 11 times. Most recently, Intel’s third-quarter revenue beat estimates, its profit was in-line with projections, and it boosted its full-year guidance. It has an ROE of 29.4% and a dividend yield of 2.65%. The company has increased its dividend for six consecutive years.
Despite all this, INTC stock is trading at 11 times forward P/E. Not bad, considering its track record. There are concerns regarding the company’s long-term competitive position in CPUs and sluggish data center growth. But that shouldn’t deter you from investing in INTC stock.
Nvidia is the leading designer of graphics processing units used in various end markets, including high-end PCs for gaming, data centers, and automotive infotainment systems. The multinational originally focused on traditional PC graphics applications such as gaming. However, it’s now working on more complex and favorable opportunities, including artificial intelligence and autonomous driving.
The company reported a record $4.73 billion in revenue in the third quarter, up 57% year-on-year, beating analyst estimates by $303.87 million. Breaking down the total sales figure, game revenue came in at $2.27 billion, up 37% from a year earlier. Datacenter revenue of $1.90 billion represents 162% year-over-year growth. EPS came in at $2.41 per share, a 25.5% beat over the analyst estimate of $1.92 per share. It continues the company’s consistent record of beating analyst estimates. Out of the last 12 quarters, NVIDIA delivered earnings beats 11 times.
Due to these reasons and more, NVDA stock gained 122.3% in the last one year. Consensus estimates are for shares to climb 13.6% in the next 12 months. The bear case estimate is for shares to rise as high as $700 a pop. Sales are estimated to jump 20.5% in the next year. Nvidia’s long-awaited GeForce RTX 2070 Super and 2080 Super GPUs are doing very well. Its also working on even more Ampere-based graphics cards to join the growing GeForce RTX 30 series.
The dividend yield of 0.1% may seem insignificant. But NVDA stock has been a blockbuster run over the last few years. And relative to the S&P 500 baseline, it has outperformed the S&P 500 by 1397.8% in the past five years. That has pushed the yield down, despite NVIDIA maintaining a healthy payout throughout the same period.
The only thing going against NVDA stock is its premium valuation. Shares are trading at 44.6 times forward P/E. Its the highest multiple in its peer group, which includes Applied Materials (NASDAQ:AMAT), Lam Research (NASDAQ:LRCX), AMD, and ASML Holding. Then again, it has one of the best track records for consistent growth and profitability. Plus, it’s investing heavily in high growth areas like AI and autonomous driving. That shall yield massive dividends moving forward.
Texas Instruments (TXN)
The chances are that if you have ever owned scientific, graphing, and financial calculators, you have heard of Texas Instruments. However, the company is much more than just a calculator manufacturer. Dallas-based Texas Instruments generates approximately 95% of its revenue from semiconductors and the remainder from its well-known calculators.
It’s the world’s largest maker of analog chips and a leading provider of digital signal processors. TXN stock gained 31.7% last year. Very impressive, considering the challenging environment due to Covid-19. The positive momentum is largely down to its consistent performance. Over the last 12 quarters, it beat analyst estimates 11 times.
TXN posted $1.45 a share on revenue of $3.82 billion in Q3. The markets were expecting earnings of $1.28 a share, on sales of $3.4 billion. Revenue increased by 18% sequentially, “with notable strength from the rebound of automotive demand and growing demand from personal electronics,” Rich Templeton, TI’s chairman, president, and CEO, said.
Like the other companies on the list, Texas Instruments has a ten-year record of profitability. Its operating margin of 40.4% stands head and shoulders above anyone in its peer group. TXN revenues rose 10% to $14.4 billion in 2019 from $13 billion in 2015. Over the same period, EPS grew 90% from $2.86 to $5.33. That kind of conversion is hard to find. It boasts an ROE of 59.9% and a dividend yield of 2.5%. It has 10 plus years of consecutive dividend growth, making it one of the best investments to start 2021.
TXN stock trades at 31.6 times forward P/E. It’s the cheapest stock in its peer group, excluding Lam Research, which trades at 28 times.
NetEase is the second-largest mobile gaming company in the world. The Guangzhou, China-based Internet technology company develops and operates online PC and mobile games. Founded in 1997, the company generated 78% of its revenue from online game services in 2019. It licenses games from developers such as Blizzard (NASDAQ:ATVI) and Microsoft, but 90% of the gaming revenue comes from the self-licensed games.
NetEase is aggressively expanding into new areas, hoping to unseat Tencent Music (NYSE:TME) in the music streaming market. It offers music streaming through NetEase Cloud Music, e-commerce through Yanxuan, internet media, and e-mail services. Online education is another area in which the company is expanding. The market of online education in China will be an opportunity of US$100 billion by 2026. The pandemic will only exacerbate the shift towards it. NetEase wants to capture a significant chunk of the market with its Youdao (NYSE:DAO) platform and the Youdao Dictionary brand.
Due to its asset-light business model, the company has an operating margin of 20.78%. Like the others on this list of best investments to start 2021, it has ten years of profitability behind it, with an enviable ROE of 25.77%. Five-year revenue and EPS growth stand at 33.1% and 15.6%, respectively. The annual dividend yield of 1% isn’t that attractive. But the company has a lot of varied investments that require substantial amounts of capital.
On the bright side, NTES has outperformed the S&P 500 by 86.3% and its sector by 128.9% over the last five years. You should not take that kind of capital appreciation lightly.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan is a contributing author for InvestorPlace.com and numerous other financial sites. A former data journalist at S&P Global Market Intelligence, he’s passionate about helping retail investors make more informed decisions regarding their portfolio.