The stock market spoiled us in 2020. Sure, we had the fastest 30% drop in history. But year to date, the S&P 500 is up 15% as of Dec. 18. That's an above-average year for the market as a whole, but there have been feast-or-famine returns from individual stocks. Some were multibaggers in a matter of months, enriching their shareholders and causing all of us to salivate over new opportunities in 2021.
The five stocks in this article (presented in random order) have businesses firing on all cylinders, making them great buying opportunities heading into 2021. To be clear, I don't know how good the returns will be next year alone -- a single year will rarely make you rich. But this coming year is a great time to pick these stocks up for the long haul.
1. Etsy: Unprecedented adoption
Niche e-commerce company Etsy ( ETSY -7.31% ) will never forget 2020. In a rapid sequence of events, COVID-19 was declared a pandemic, face masks were touted as a mitigating solution, and Etsy suddenly had more demand for handmade face masks than it could possibly meet.
The platform enjoyed unprecedented adoption this year. Management mobilized existing sellers to pivot toward face masks, allowing over 60,000 of them to capture value from the opportunity. As sellers captured more value from the platform, they started advertising more with Etsy Ads, causing this revenue source to spike to all-time highs. Furthermore, active buyers have grown 55% year over year in 2020 with a solid mix of first-time customers and previous users returning to the platform.
With more Etsy sellers, there's more high-quality inventory available on the platform. This attracts more buyers, which attracts more sellers and so on. In short, Etsy elevated itself to a top-of-mind e-commerce platform in 2020.
Through the first three quarters of 2020, revenue is up 102% year over year. The company probably won't grow as much in 2021 as it did this year, which might make some investors nervous. But in my opinion, Etsy just became an e-commerce force to be reckoned with for the foreseeable future, making it worthy of buying even though it's already up over 300% year to date.
2. Roku: A no-holds-barred happy new year
Streaming-video platform Roku ( ROKU -2.24% ) is another stock market darling from 2020, up about 150% so far this year. According to September data from eMarketer, cable, satellite, and telecom TV providers are expected to lose 6.6 million subscribers this year, the most ever in a single year. Increasingly, people are turning to platforms like Roku, and the company's growth rate reflects this. In the third quarter, Roku reached 46 million active accounts, a 43% year-over-year increase.
Roku users streamed a whopping 14.8 billion hours of content in the third quarter alone, or 3.5 hours per user per day. This highly engaged and fast-growing user base was enough to lead my Motley Fool colleague Rick Munarriz to believe Roku is a stock worth buying in 2021, and that was before the company signed a deal for HBO Max.
As of Dec. 17, HBO Max is available to Roku users. This is a big deal, because all the major streaming channels are now available for streaming on the company's platform. In my opinion, this reduces potential friction: Previously people may have hesitated to use Roku if they couldn't access all of their preferred channels. Considering this friction is now gone, and the cord-cutting trend is accelerating, I wouldn't be surprised if Roku's user growth in 2021 rivals that of 2020.
3. Ollie's: Continuing rapid and profitable expansion
Discount retailer Ollie's Bargain Outlet Holdings ( OLLI -20.47% ) has had a great 2020 too. But the company isn't necessarily seeing increased adoption like Etsy, Roku, and (as we'll see in a moment) Square ( SQ -5.64% ). Ollie's was simply able to remain open when other stores were closed, leading to robust same-store sales growth. Through the first three quarters of 2020, Ollie's comps increased 19% year over year, leading to operating leverage and higher-than-normal profits.
Presently, Ollie's stock trades relatively cheap at just 24 times trailing earnings. That's because investors are likely worried about comps declining in 2021, and I agree that the COVID-19 boost was likely temporary. But the company is set to continue delivering overall revenue growth by opening new stores. Ollie's only has 389 stores right now, but it intends to open 50 to 55 new locations in 2021 alone. And considering how many retail bankruptcies there were in 2020, there could be a lot of attractive locations available.
Furthermore, Ollie's profit margin is attractive even if comps growth stagnates, providing management with a lot of cash to reward shareholders. For example, it just authorized a new $100 million share repurchase program. Given these factors, right now could be a good entry point for long-term Ollie's investors.
4. Square: An overlooked reopening stock
Fintech company Square has two parts to its business, and the Cash App ecosystem side has been on fire in 2020. With the coronavirus pushing cashless transactions, Square was perfectly positioned to capture the opportunity. In the third quarter of 2020, Cash App segment revenue (excluding bottom-line-neutral bitcoin revenue) was up 174% year over year as daily active users almost doubled. This incredible adoption is why Square stock is up nearly 300% in 2020.
Cash App gains are likely permanent -- it's hard to imagine people returning to cash after getting their first taste of modern fintech solutions. But not only has Square gained during the pandemic, it's also poised to benefit from the world getting back to normal too.
Square's Seller segment serves many small and medium-size businesses, which are among the hardest hit from the pandemic. The company's third-quarter Seller revenue was somehow still up 5% year over year despite the challenging circumstances. This is partly because Square's software helped businesses develop omnichannel strategies (combining online and brick-and-mortar operations) to keep things going during shutdowns.
As our society moves beyond the coronavirus, businesses that survived should be set to thrive again, benefiting Square. And as new businesses spring up, I'm betting they'll see the value in the services Square provides. In short, I bet the Cash App segment retains its users, and the Seller segment surges, making 2021 a great year for Square yet again.
5. Criteo: Finally an improving outlook?
Lastly, ad-tech company Criteo ( CRTO -0.54% ) has the cheapest valuation of the stocks on this list, because investors don't believe its business is poised to thrive due to uncertainty with the third-party browser cookie. Ad-tech companies are able to deliver value for their customers by displaying targeted, relevant ads for the general populace. But so much of their ability to do this depends on third-party browser cookies, and there's a chance these could go away completely.
Investors don't believe Criteo has a viable business in a post-cookie world. This pessimistic outlook means Criteo stock trades under 12 times forward earnings estimates, making it a dirt-cheap value stock. But if Criteo indeed has an unsustainable business model, then it's nothing more than a value trap.
However, fellow ad-tech company The Trade Desk recently launched something called Unified ID 2.0, a solution for a cookie-less world, and it's not proprietary. The company hopes it will become the industry standard for gathering data in a way that respects privacy concerns. Indeed, Criteo and others have already signed on. The Trade Desk CEO Jeff Green said, "I firmly believe that Unified ID 2.0 will reach critical mass and adoption next year."
In a best-case scenario, Unified ID 2.0 could provide Criteo with the framework to thrive for years to come, giving the stock upside. In a worst-case scenario, Unified ID 2.0 won't be as good as advertised and Criteo will be looking for something else. Because of its cheap valuation and ongoing profitability, I don't believe Criteo has far to fall if things go wrong, but it has room to grow if things go right. This favorable risk-reward scenario makes this stock worth betting on going into 2021.
Remember, I'm not saying these five stocks can make you rich over the next 12 months alone. Life-changing returns often take years, if not decades. But I believe Etsy, Roku, Ollie's, Square, and Criteo are good stocks to start an enriching journey in 2021.
If these seem too high risk for you with the market at all-time highs, there are plenty of low-risk options out there as well. Just remember that you can't get rich in the stock market while watching from the sidelines. It's important to get invested sooner rather than later.