Investors went on a wild ride in 2020. Stocks were initially hit hard due to the COVID-19 pandemic but then rallied as the year went on. Stocks have seemingly defied gravity, or at the very least were able to look past the significant economic hardship the pandemic was creating.
The new year brings the promise of a vaccine, which hopefully should allow life to get back to normal and spark an economic recovery in time. Three Motley Fool contributors believe AerCap Holdings (AER 0.08%), Ford Motor (F 0.69%), and Carnival (CCL 1.13%) (CUK 0.88%) are stocks worth buying for the economic rebound.
Image source: Getty Images.
The best way to invest in a travel recovery
Lou Whiteman (AerCap): Airlines were hit hard during the pandemic, and stocks that rely on the airlines for revenue fell along with the carriers. AerCap, which is in the business of buying airplanes and leasing them back to airlines, was among the casualties. The company's shares lost nearly 75% of their value during the early days of the pandemic as investors feared the highly leveraged business would be forced into bankruptcy by airlines that couldn't pay their bills.
Those investors underestimated the strength of AerCap's balance sheet. The company was forced to take more than $1 billion in charges to writedown the value of its aircraft portfolio and deferred more than $350 million in lease payments for hard-hit customers. But AerCap still has more than $11 billion in total liquidity, as of the end of the September quarter, and $25 billion in unencumbered assets to borrow against if things get worse.
With the arrival of the vaccine, things shouldn't get worse from here. Airlines are going to need years to rebuild their bruised balance sheets, but with each passing month we should see travel demand increase slightly as the vaccine becomes more widespread. Even if it is not enough to ensure the airlines will be profitable in 2021, it should be enough to allow them to pay their bills, which means AerCap will see business get back to normal even before travel returns to pre-pandemic levels.
AER vs. the markets data by YCharts
If anything, airlines that have taken on billions in debt to survive the pandemic will likely be more focused post-crisis on leasing planes instead of buying them and putting the added debt on their balance sheets. Yet AerCap shares continue to lag the broader markets, and as of this writing actually trail the U.S. Global Jets airline exchange-traded fund (ETF) year to date.
The market has this one wrong. If you believe travel demand will eventually return -- and I do -- AerCap should gain significant altitude in the quarters to come.
Why Ford could be next year's automotive growth story
John Rosevear (Ford Motor): I know the idea of investing in Ford might seem a little silly to growth-minded investors still giddy about their Tesla gains over the last year. But bear with me here because there are two good reasons why Ford could be a surprise market-beater in 2021.
First, with big automakers, stock prices tend to follow sales -- and auto sales tend to bounce early in economic recoveries. The post-COVID recovery won't be exactly the same as a typical post-recession rebound, but the recovery in consumer and business confidence should drive a jump in sales of cars, trucks, and SUVs in 2021.
Tesla who? Ford's own electric hot rod, the much-anticipated Mustang Mach-E, is heading to dealers just in time for the post-COVID recovery. Image source: Ford Motor Company.
Second, Ford's stock outperformed most other automakers during the last recovery (2010-2011) because the Blue Oval had good, fresh products coming into its dealers' showrooms just as buyers were coming back -- and while rivals were scrambling to catch up. That could be true this time, too.
Ford's all-new 2021 F-150 pickup, the brand-new Bronco Sport SUV, and (speaking of Tesla) the new electric Mustang Mach-E have all just begun shipping to dealers. The timing couldn't be better: The F-150 is Ford's best-seller, and the other two are the kind of vehicles that bring curious consumers into showrooms.
There's more to come in 2021, including the much anticipated new Bronco, a refreshed version of Ford's big Expedition SUV, and a brand-new small pickup that might be called the Maverick. A little further out, we're expecting new electric versions of the F-150 and the huge-selling Transit commercial van, as well as an all-new (non-electric) Mustang.
Ford's stock has slipped over the last few years because its product portfolio was getting long in the tooth. It didn't help that Ford cut its dividend early in the pandemic, when the outlook seemed bleak. But now, Ford's product pipeline is looking strong, just as an end to the pandemic is coming into sight. If the next couple of quarters go well, the dividend could be reinstated sometime next year. That all bodes well for Ford stock in 2021.
Buying cruise lines before they're back to normal
Rich Smith (Carnival): Coronavirus devastated the U.S. cruise industry, which spent 75% of the year confined to port under "no sail" orders issued by the Centers for Disease Control (CDC). Even the arrival of a "framework" for "conditional sailing" at the end of October didn't end the industry's pain because, to date, no one is cruising out of the U.S.
As 2020 draws to a close, shares of Carnival -- the biggest company in the industry -- are still down 53% from where they were a year ago. But that could all change in 2021.
Already, here and there, cruise lines are preparing to run passengerless "simulated voyages" to earn CDC certificates that will allow them to return to business. In anticipation of that, cruise lines are starting to schedule at least short-duration cruises, such as the 18 Canada-to-Alaska trips that Carnival is planning beginning in May 2021.
Not coincidentally, May (or June or July) are the months most often cited as the time by which most Americans who want to be vaccinated against the coronavirus will have been vaccinated, reducing the health risks of cruising. If all goes well, by the second half of the year, things should be starting to get back to normal for Carnival.
What will "back to normal" look like? Let's assume that in 2022, for example, Carnival is able to do something approaching the level of business it enjoyed in 2019. That would mean $21 billion or so in revenue and $3 billion in profits. At a recent market capitalization of $24 billion, Carnival would be valued at just eight times earnings -- roughly half the stock's average forward price-to-earnings ratio over the past 10 years, according to data from S&P Global Market Intelligence.
Put another way, I see the potential for Carnival stock to roughly double in price next year as investors begin to look forward to what it might earn in 2022. I think that could make Carnival Corporation stock a big winner in 2021.
