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The 2021 ETF: 10 Stocks for 2021

1/3/2021

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I had floated the idea of presenting 10 stocks for the new year, which fellow investors can invest in as an ETF equivalent (mimic by investing 1/10th in each). The response was overwhelming.
As a result, with all caveats and reservations in mind, this blogpost is about my Top 10 picks for 2021. If you've been meaning to invest in individual stocks, but were not sure of where to begin, or needed some reasonable ideas, I hope this can provide a reference point (with fractional investing here, you can literally recreate this portfolio with as little as $10). Let's get through a couple obvious disclaimers and get right onto the portfolio:

1. Calendar investing isn't really a thing: We don't invest or change investment decisions, just because its a certain date on the calendar, or a certain position this planet happens to be on its orbit. So, let's keep that in mind. I'm picking companies that I'm comfortable to own for much longer than a year and the list just favors those that happen to be at what I think opportune entry points. There are companies outside of this list that I'm actually more bullish on for long term (e.g. Google and Facebook aren't on the list).

​2. Fit: I have no idea what your specific risk tolerance is, or what your financial goals are. I would ideally suggest 10 different stocks to every individual investor based on their goals (and do comment/reach out to me with your situation and I'll get back to as many as I can with adjustments), but as a generic blog - this is my playground. Now without taking up any more of your time, let's get into it and see what're we playing with:

The 2021 Portfolio:

(In no specific order or weightage)

1. Bristol-Myers Squibb  : BMY
2. Merck                            : MRK
3. Regeneron                   : REGN
4. Alibaba                         : BABA
5. Amazon                        : AMZN
6. Lowe's                          : LOW
7. Salesforce                    : CRM
8. Healthcare 3x               : CURE
9. Social Capital HH VI    : IPOF
10.Altimeter Growth        : AGCUU

Picture

Tracking:

To make tracking easier, here's a Google Doc: Click here to Access​
Here's a starting snapshot:
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As this is published before the first trading day of 2021, you can mimic the investments above and join along. Above models a conventional $10,000 figure invested.

Rationale:


---Those who follow me may already know my view on the markets and some of the companies mentioned above (Here's a Seeking Alpha article I wrote on the 2021 outlook). So, here's a 30,000' view of the rationale (and I can do a follow up post responding to all questions/requests) - 

1. Value:

I wanted to balance growth with value and hence the portfolio starts of with value names like Bristol Myers Squibb and Merck. Both have gone through a consolidation phase, have a good dividend yield, and sit at attractive valuations.

  • Bristol Myers has nicely built upon Celgene's acquisition and is forecasted to continue to generate mid-teens EPS growth for some years. It trades at just ~6.5x '21 EPS, adjusted for debt and 3% dividend yield. While Merck isn't as cheap (trading at (still very attractive) ~8x '21 EPS, adjusted for debt and 3% yield), it has higher visibility into mid-late 2020s as Keytruda's patent life goes on for years beyond Bristol Myers' Revlimid. They were both surprisingly down for 2020 and the timing presents limited downside.
 
  • Sticking to biotech, Regeneron is a name I've owned for years and after the recent fall (driven by sentiment around vaccines as Regeneron is known for its antibody cocktail), it trades at 13x '21 EPS, which makes it a unique value-growth play. Plus, while there's a slight risk to Merck's Keytruda dominance, the challenger Libtayo, is developed and owned by Regeneron. Having both in the portfolio evens out the risk.

2. Growth:

The hunt for profitable 20-30% revenue growers which had secular tailwinds for years to come - led me again to tech names. I filtered the list to those who have had a recent setback in price or have gone through a considerable consolidation phase. This led to me to: Alibaba, Amazon and Salesforce.

Alibaba is undergoing antitrust scrutiny, Amazon forecasters fear harder comps in 2021, and Salesforce analysts are not giving Marc Benioff any benefit of doubt over Salesforce's acquisition of Slack. I see all of these being temporary. As these names go on to deliver great quarters and beat expectations (hopefully), sentiment could change.
  • Alibaba has built upon China's swift recovery from the pandemic, is projected to grow revenues 30-50% for both '21 and '22, and still manages to trade at <19x '22 EPS.
  • Amazon is slated to grow revenues 35% in '21 and 18% in '22. I believe '22 estimates are low. AWS spending could continue to increase as businesses continue to go digital + new Prime members will continue to spin the Amazon flywheel. It currently trades at ~36x EV/TTM EBITDA and ~3.5x '21 sales.
  • Salesforce easily beat expectations, repeatedly, in 2020. Its addressable market has continued to expand and Marc Benioff continues to pursue a much broader slate with continued acquisitions. After the recent fall, its still expensive on most metrics, but the acceleration in growth and sustenance of new growth areas provide clarity enough to forecast growth in the years out. Its expected to be the fastest software company ever to reach $25B in revenues in '22 and reach $30B in '23. It currently trades at ~8x '22 revenues.

3. Risk:

The last 3 names on the list add significant risk to the portfolio:

a) Leveraged ETF:

Readers maybe aware that I trade around leveraged ETFs and I thought it'll be only fitting to include one name here. If I had an option to add weightage, I'd allocate <1/10th to CURE, but in here it qualifies as a 1/10th holding, to keep things simple.

While same time last year, I would've gone with either BIB (2x biotech), SOXL (3x semiconductors) or FNGU (3x FANG names); looking where we are now, Healthcare to me seems like a sector that hasn't participated much in the 2020 rally and major names in the XLV (CURE is 3x XLV) sit at reasonable valuation: JNJ, UNH, PFE, MRK, ABBV, etc. are major holdings. So let's roll the dice.

b) SPACs:

2020 was the year of SPACs and quality of sponsors, for me, is the make-or-break criteria. Chamath Palihapitiya and Brad Gertsner  are one of the smartest investors around. IPOF and AGC are their respective SPACs. These are also risky shot-in-the-dark options, as we don't know what they're gonna acquire yet, but if these work out well, they may offer significant edge to the portfolio. 
I believe we aren't that far into the SPAC craze to have exhausted good targets, and these two respected investors will carve out a niche investment in the fast growing tech space.

4. Balance:

I wanted to diversify a bit into retail/housing and went with Lowe's which offers a decent GARP profile. Housing has been super strong in 2020 and people who have moved into suburbs or bought new houses, will continue to furnish/fix them. Lowe's saw unexpected growth in 2020, but I believe the turnaround which was already underway helped it perform better than the industry + new customers may continue to prefer Lowe's over the coming years. Adjusted for debt and yield, Lowe's currently trades at ~18x '22 EPS, which is fair - not cheap, but I'm banking on the continued turnaround for performance to beat expectations.

I wrestled with:
1. Adding Wayfair (W) instead of LOW or CRM, but with other risk assets in the portfolio, thought a mix of LOW+CRM would be a more dependable choice. I do think Wayfair's ~$20B valuation is attractive though, if they continue being profitable in 2021.
2. Adding FB & GOOG - it would've led to high concentration among FANGs and I'd just mimic the S&P 500 heavyweights, which I resisted the urge to. I kept to adding 1 of the lot and did so for the name longest in current consolidation.

Overall, I've resisted the strong urge to go big into reopening sectors. Yes, we know that the vaccine is here and things will go back to normal sometime in 2021- but easily forecastable sectors (restaurants, hotels, etc) have already rebounded, while those at discount are difficult to forecast (air travel and cruise lines, for example). Not looking at sectors, I've looked at individual names that are attractive at this point and those that I can understand. Somehow again, I've ended up with healthcare and tech. We have 4 healthcare names, 5 tech names in the portfolio (2 SPACs will most likely be tech) and 1 consumer/housing play. Let's hope things get back to normal ASAP, but.. we still beat the market with this portfolio :) Best of Luck to us - Happy Investing! 

Let me know any/all of your thoughts/questions/concerns with this selection. If you liked this post/strategy, do share it with your friends :)

Disclaimers: 
1. I am long all the stocks mentioned above, but am not paid by anyone to recommend these.
2. I am not a financial advisor.
3. Invest at your own risk (Do reach out for suggestion for substitutions/adjustments)
---
Announcement 1:
If you've been meaning to start fractional investing, here's a link to Robinhood. If you use this link, we will both get a free stock + I'll answer any questions you may have (on IG). Link: https://join.robinhood.com/sunnyg
---

Announcement 2: 
I do #TipTuesdays on my Instagram where every Tuesday evening, I give out a stock tip/investing best practice. For a limited time, I'm also answering ALL DMs. Slide into my DMs with any and all questions. Handle: @thesunnypoint

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