When all is said and done, 2020 will likely go down as the most tumultuous year since the 1960s. We had:
- The first global pandemic in more than a century.
- Race-related demonstrations in cities big and small.
- A very close presidential race.
- An economy that saw GDP fall by nearly one-third while unemployment skyrocketed.
- A stock market that fell faster than at any point in recorded history.
Here's the truly odd part: Despite all this news, it still paid to be a buy-and-hold investor. The S&P 500 is actually up around 13% for the year; the NASDAQ even more -- roughly 36%. Both are far larger than an average year's gain. While the headlines focus on the bad news, the stock market reflects the truth that things continue to progress bit by bit. This progress overwhelms the downturns.
In the spirit of investing in this incredible wealth maker in the year ahead, we asked five of our analysts what stocks they consider to be "buys" heading into the final month of the year. Read below to see why Sea Limited (NYSE:SE), Pinterest (NYSE:PINS), CareTrust REIT (NASDAQ:CTRE), Tanger Factory Outlets (NYSE:SKT), and Cleveland-Cliffs (NYSE:CLF) all made the cut.
Three great businesses, wrapped into one
Brian Stoffel (Sea Limited): If you told your 1990s self that you'd be getting most of your goods delivered by Amazon -- at the time, just a bookseller -- it would make no sense. That is, until you realized the company's ambition has always been "to be earth's most customer-centric company."
I get the same feeling about Sea Limited, which started out as a gaming company and has become so much more: an e-commerce platform with a payment solution that's growing very fast. All of this serves a larger mission: "to better the lives of consumers and small businesses with technology."
Consider how all three segments are performing, and you'll see that Sea (sorry, I couldn't help myself) is well on its way to fulfilling that mission.
- Gaming: Owner of one of the world's most popular freemium games (Free Fire), this unit saw total users jump 78%, while paying users more than doubled. That translated into bookings and Adjusted EBITDA more than doubling year-on-year.
- E-Commerce: By focusing exclusively on seven maritime nations (Indonesia, Vietnam, Thailand, the Philippines, Malaysia, Singapore, and Taiwan), Sea is building out the fulfillment network to be the primary e-commerce player in the region. Last quarter, orders and gross merchandise volume (stuff sold on the Shopee platform) more than doubled.
- Payment options: While still small, the SeaMoney digital payment option has seen rapid adoption. Total payment volume has more than doubled in the last six months alone.
All of these parts feed off each other. That's especially true of the payment option -- which can hook users by getting them to use SeaMoney during in-game purchases or on Shopee's website. Such strong results are why -- when trading rules allow -- I'll be adding shares to my family's portfolio.
There's always a season for it
Jeremy Bowman (Pinterest): Pinterest shares have already surged this year, but there are a number of reasons that December could be its best month yet. The fourth quarter tends to be the company's seasonally strongest period of the year as advertising spending spikes during the holiday season. This year could be especially fruitful for Pinterest, because the image discovery platform looks perfectly positioned to benefit from a number of trends.
First, e-commerce is set to boom this holiday season, with coronavirus cases spiking across the country and retail traffic sluggish. Pinterest has recently improved its shopping ads, which are integrated with e-commerce, and online sellers tend to prefer advertising on digital platforms like Pinterest. Americans still plan to shop this holiday season. In fact, the National Retail Federation forecast holiday sales to rise 3.6%-5.2% this year, a promising sign for Pinterest, as is the early start to the holiday season as CFO Todd Morgenfeld referred to on the last earnings call.
The company's unique position as a network where users come to work on themselves rather than connect with others and its focus on positivity also gives at an advantage over Facebook and other peers. The Facebook boycott from earlier in the year still seems to be driving advertisers away from the social media giant and to smaller platforms like Pinterest, and there are signs that small businesses are also dissatisfied with Facebook.
Pinterest is targeting 60% revenue growth in the fourth quarter, and the company is well-positioned for growth after the pandemic as its user base has surged during the crisis, and verticals that have historically been strong like weddings and travel will bounce back when the economy normalizes. Even with the stock having more than tripled this year, there's plenty of upside potential left in Pinterest.
A pure play in a critically important business
Jason Hall (CareTrust REIT): The nursing home industry has been one of the hardest hit from the coronavirus pandemic, both in the human toll and the financial impact. Many facility operators are on the ropes, with higher expenses arising from steps to keep residents and staff safe, along with lower revenues since many can't admit new residents to replace those who have moved out over concerns about the risks.
We aren't yet out of the woods, and won't be until there's widespread availability of vaccines and more treatments. But CareTrust REIT has proven the best company to own in the seniors housing industry, and it's worth buying now.
In Q3 2020, CareTrust reported it has "consistently collected 99% of monthly rents," earning $0.34 per share in normalized funds from operations, and keeping its $0.25-per-share quarterly dividend secure. These consistent cash flows have also meant CareTrust's balance sheet has remained strong, with some of the lowest leverage ratios in of its peers. At the end of the quarter, CareTrust's debt to EBITDA ratio was 3.1 times, close to half that of some of the largest companies in the space, like Welltower and Ventas.
The bigger opportunity is what happens next. By 2040, the U.S. Census Bureau predicts that there will be 80 million Americans 65 and older. That's double the 2010 population of the same age cohort. As Baby Boomers age, this generation will live longer than any other in history. CareTrust is set to play an important role in caring for and providing access to seniors housing for this generation. Investors who buy now can enjoy a 5% dividend for now, and then multiple decades of growth to follow.
A vaccine rebound play
Tim Green (Tanger Factory Outlet Centers): The shopping mall industry was already in big trouble before the pandemic, beaten down by the rise of big-box stores and online retail. That decline was accelerated as COVID-19 forced shutdowns across the country. Major mall operators CBL and Pennsylvania Real Estate Investment Trust filed for bankruptcy this year, joining a slew of mall-based retailers throwing in the towel.
Investing in malls right now seems insane given the problems facing the industry, and in most cases it probably is. But Tanger is different. The real estate investment trust operates 38 primarily open-air shopping centers in the U.S. and Canada. The company focuses on offering shoppers bargains, something that can't be said for traditional shopping malls.
Tanger offered its tenants the ability to defer rents in April and May as the first wave of the pandemic raged, and many tenants took the company up on the offer. Rent collection has improved dramatically since then – Tanger collected 89% of billed rents for the third quarter, up from just 47% in the second quarter. Over 99% of occupied stores had reopened by the end of the third quarter, and visitor traffic in September had essentially fully recovered despite fewer operating hours.
Of course, a tough winter featuring increased pandemic restrictions and more retailer bankruptcies could hurt Tanger's results. But the company has plenty of liquidity to ride out the storm. Total liquidity sat at $640 million at the end of October, including $600 million of fully unused credit lines. No significant debt matures for Tanger until the end of 2023, and the company pays an average interest rate of just 3.6% on its existing debt.
In other words, Tanger is very likely to make it through to the other side. With the stock down more than 40% from its 52-week high, the end of the pandemic could mean a huge rally for this beaten-down REIT.
In management I trust
Tyler Crowe (Cleveland-Cliffs): When it comes to investing in companies that are either very cyclical or have exposure to commodity prices, one of the most important questions an investor needs to ask is "Is management good at creating value?". When it comes to iron ore and steelmaker Cleveland-Cliffs, management has built a rather strong track record of creating value despite some major headwinds over the past several years.
The current management team, led by CEO Lourenco Goncalves, inherited a mess of a company in 2014. The prior management team had taken on a "growth at all costs" strategy at the height of the Chinese commodity boom. As iron ore and steel prices started to decline, it left the company with a cornucopia of bad assets, a slag pile of debt, and was looking like it was days from bankruptcy.
Over the next three years, Goncalves stripped down the business to its most profitable assets, trimmed its debt load by 51%, turned it free cash flow-positive, reinstated a dividend, started buying back shares, and grew the business into North America's largest steelmaker by acquiring steelmakers in distress.
The steelmaking and iron ore business is a tough one. It is highly sensitive to economic output, its margins aren't super high, and it's capital intense. This new strategy has more than doubled the company's debt from its low point and turned free cash flow negative, as the company invests in its new operations and shoulders their debt. That said, Cleveland-Cliffs management has proved that it can deftly navigate a challenging industry and generate shareholder returns. Wall Street hasn't noticed this until recently -- shares are up more than 30% so far this year -- but there is still plenty of room for America's largest steelmaker to integrate its new businesses and generate returns.
Here's to a great start to 2021
This will go down as a year to remember (or forget)! Surely, you don't need to run out and buy all five of these stocks right now. But they're all worthy of your consideration. Our top analysts have faith in them, and if -- after your own due diligence -- you agree, a few of these could set you up for long-term gains years from now.,