With 2020 winding down, it's time to consider how your portfolio should be structured to deal with both the challenges and opportunities of the coming year. And while it's rarely a good idea to make wholesale modifications to your portfolio simply because of a change in the calendar, there are a handful of equities that seem to be poised for an exceptionally strong 2021.
Which stocks are "must-owns" in the new year? The beaten-down air travel company American Airlines Group (AAL +8.01%) and the healthcare giant Pfizer (PFE 0.77%) may not leap off the page as screaming buys, but a closer look at their underlying value propositions suggests that these two large-cap stocks could be big winners in 2021 and beyond. Here's why.
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American Airlines: Buy the fear
American Airlines is a contrarian pick to be sure. The airline industry has been smashed by global travel restrictions stemming from the COVID-19 pandemic. Driving this point home, American's 2020 third-quarter revenue fell by a whopping 73% compared to the same period a year ago. Worse still, the company is currently burning through $25 million to $30 million a day, as demand for air travel remains suppressed due to governmental and corporate restrictions worldwide.
Another point of concern is its sky-high debt load. American took on a boat load of debt leading into the pandemic in order to update its mainline fleet. As a result, American now sports a market cap of approximately $10 billion, but a debt load of over $40 billion. That's not an appealing setup for most value investors, to put it mildly. But there is arguably more than meets the eye with this titan of the skies.
So why buy this struggling, debt-laden airline? The current consensus among industry insiders is that demand for air travel won't return to pre-pandemic levels until 2024. American, in turn, will likely have to ride out the next 36 months before it returns to a cash flow positive operation on a consistent basis. But this massive U.S. carrier does have two strong tailwinds working in its favor over the next 12 months:
- Congress and the Biden administration are highly unlikely to let this flagship airline go bankrupt for both both political and economic reasons. The company, in short, will be given the required liquidity, by the federal government if necessary, to weather the storm. In fact, American has already received generous amounts under the CARES act to keep it afloat during the height of the pandemic.
- Although a full return to normal may take multiple years, demand for air travel should pick up sharply from current levels by mid to late 2021. By the end of the first-quarter, after all, there could be four to five Western-developed coronavirus vaccines in circulation around the globe. Worldwide travel restrictions, in kind, should start to ease off ahead of the all-important summer season.
Bottom line: American will undoubtedly take several years to fix its balance sheet after the pandemic. But the worst should be over for the carrier by the middle of next year, if not earlier. And Wall Street rarely fails to take notice of a good rebound story in a well known brand such as American. As such, this beaten-down airline stock ought to perform fairly well over the whole of 2021.
Pfizer: A promising growth and dividend play
Pfizer is arguably another oddball pick as a "must-own" stock for 2021. After all, the pharmaceutical giant has lagged well-behind both the broader markets, as well as the biopharmaceutical industry, in terms of its total returns on capital over the past two decades. Its lackluster performance over this period has been due to a unfavorable mix of never-ending patent expires, along with management's snail-like response to the various challenges presented by generic competition.
Pfizer, though, finally appears to be nearing an inflection point. The reason being is that the pharma titan has been busy streamlining its operations over the past two years by repackaging underperforming segments like Consumer Healthcare and off-brand legacy products. These savvy business development moves should thus allow newer growth products -- such as the breast cancer drug Ibrance, the blood thinner Eliquis, and the ATTR-cardiomyopathy medicine Vyndaqel -- to shine more brightly as the new decade unfolds.
Pfizer, in fact, is forecasting a compound annual growth rate for its top-line of 6% over the period covering 2021 to 2025 -- and that's not even including the potential windfall from its groundbreaking COVID-19 vaccine. What's more, Pfizer's stock is currently trading at an attractive 12.5 times forward-looking earnings, and it offers a rather healthy dividend yield for a mega-cap pharma stock.
All told, this big pharma stock seems poised for a banner 2021, thanks to its noteworthy growth prospects, compelling valuation, and outstanding dividend program.
