We continue to study profitable instruments for investments in 2021. Which companies’ stocks are worth betting on this year: growth or value? We share current ideas for long-term investments. We assess the prospects for the Russian stock market.
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Portfolio earnings in 2020 have depended heavily on the mix of value stocks and growth companies. We think both categories are worthy of investors’ attention, especially since there is no clear definition of these classes.
We believe that value stocks are those which are valued at a discount to the market by multiples. Growth companies are those whose business is growing faster than the market average. But there are no clear limits on how cheap a stock must be to be considered value. Moreover, the most popular indices for value and growth – the Russell 1000 Value Index and the Russell 1000 Growth Index – overlap by about 40%.
In our strategy, we still distinguish two types of stocks: growth companies (high-tech companies, IT sector), which are the beneficiaries of the pandemic, and cyclical stocks from more traditional sectors – financials, commodities, automotive, aviation, services, etc.
In the investment houses’ recommendations for the current year, everyone was betting on value companies. The calculation is clear: a vaccination is in progress, the pandemic will end, the economy will begin to recover, the usual offline business will come to its senses, and IT companies with their remote work are no longer so interesting.
We already saw something similar in the first few months of 2020 (rotation from growth to value). Value stocks have rebounded strongly relative to technology companies, having practically won back all of last year’s imbalance. And for several companies, the recovery has already reached pre-pandemic levels.
For example, in our strategy, we chose the following top picks: ViacomCBS, Western Digital, CF Industries, Mosaic, Nokia, Goldman Sachs, Morgan Stanley, Southwest Airlines in the value segment, and Amazon, Facebook, AMD, Square, Salesforce, Zendesk in the growth segment. ViacomCBS managed to post over 200% returns and lost most of it in the first quarter; CF Industries and Mosaic were up 50%. Air carrier Southwest Airlines came in pre-pandemic, despite a loss-making 2020 and a challenging 2021.
The pandemic is not over, with Europe extending restrictive measures. Meanwhile, the stocks of cyclical companies that have racked up debt and losses are already standing as if no coronavirus ever happened. This may cause some concern. However, we don’t see any bubbles in them yet. In theory, the market could “accelerate” them further. Right now they are, shall we say, fairly priced.
On the other hand, companies from the growth list, which are interesting from the investment point of view, have slowed down. Many – on the contrary, have fallen in price since the beginning of the year, that is, have become even more attractive. The fundamental cause for them has remained intact.
Expectations for cyclical companies before the beginning of the reporting season are already quite high and just good results will not be enough to justify them. Well, the situation is the opposite for technology companies: they do not need to raise the annual forecast and just report a little better than expected.
What to invest in right now
When you open a position on shares, first of all, you need to focus on a concrete idea with concrete growth drivers, be able to see the business prospects, and estimate its potential.
We have selected three options for long-term investments that will be of interest to a wide audience.
General Motors (GM).
An excellent example of a company with both value and growth, two in one. The trend toward electric vehicles for the next few decades is obvious to all. At the same time, there is little talk about other names in this segment besides Tesla. Elon Musk’s company has grown nearly 900% since the end of 2019. It has been followed by relative newcomers to this niche: car giants, Chinese companies, American startups. Some do not yet have any production of electric cars, not even a prototype, but they are already worth tens of billions of dollars.
In this respect, General Motors has the most thoughtful and already implemented strategy in the area of drones and electric cars. It is one of the most profitable car companies in the w
orld, with a stable business. Right now it is trading at the price of its classic business, but the electric and drone direction is supposedly worth more than the classic, profitable business. The market is grossly undervaluing it.
You don’t know what to invest in, invest in Amazon. This business will always be relevant. First, it is the undisputed leader in the e-commerce market. Second, the company has many divisions, and its business is diversified: cloud services, artificial intelligence, streaming services, gadgets, media, and, more recently, telemedicine. It is believed that the remote medical care market will grow by 25% a year for the next 7 years. Amazon is well-positioned to take a bite of the pie.
Walt Disney (DIS).
Another example of the combination of the technology and conditionally cyclical segments. Because of the pandemic, the company closed all of its theme parks, all of its offline business. What remained online was content and the Disney+ streaming service, launched in the fall, which is now breaking records in attracting new users. There is no doubt that the company will capture a significant market share here. Once the pandemic is over, their classic theme park business will be up and running. Two big drivers of growth and development.
Shares of Russian companies
One last thing about the Russian stock market, which is generally in line with the global market as far as cyclical and technological companies are concerned. The year 2020 was a difficult one, not only because of the pandemic, but also because of the dramatic drop in oil prices. 2021 will also be difficult: low consumer activity and falling disposable income will probably remain the main companions of the Russian economy.
The main risks are related to possible sanctions and the dynamics of energy prices. It is not yet clear whether new sanctions will still be “cosmetic” (directed against specific officials and companies) or more tangible. For example, disconnection from SWIFT, a ban on the purchase of government debt and corporate bonds of Russian issuers. The new U.S. administration is still only feeling out its foreign policy priorities.
There are several potential negative factors for oil prices. It is unclear how long Saudi Arabia is willing to altruistically hold prices alone by reducing production when other OPEC+ members are increasing it. There is a possibility of a renewed U.S.-Iran nuclear deal, leading to a full or partial lifting of the embargo. Shale production in the U.S. is feeling confident within the current prices, which may also make adjustments in this market in the long term. We expect oil prices to decline from current levels.
All of this does not mean that the Russian equity market will move into a decline phase. On the contrary, large companies with a focus on domestic consumption will be able to significantly increase their market share, both in online and offline segments.