One of the craziest years in history for the stock market is now in the books. After shedding 34% of its value during the first quarter, the benchmark S&P 500 rallied to finish 2020 higher by 16%. It was the fastest bear market decline in history, followed by the most ferocious rebound rally on record.
It was also a big year for growth stocks and innovation. Approximately 10% of all stocks with a market cap of at least $300 million finished 2020 higher by at least 100%. That's an incredible figure which probably isn't duplicable in 2021.
As we move headlong into a new year, it's quite possible we'll see some of 2020's highfliers come back to Earth. Below are five ultra-popular stocks that could realistically lose 50% or more of their value in 2021 as investors reassess their outlooks.
Image source: Getty Images.
NIO
Few industries were hotter than electric-vehicle (EV) manufacturers in 2020. China-based NIO (NIO 2.30%) was one of the market's top performers, with a gain of more than 1,100%. NIO has seen capacity increase and vehicle margins reverse from a single-digit negative figure to a positive double-digit number. Most importantly, the company raised billions of dollars last year, which puts to bed any near-term financing worries.
But there are two concerns that could come back to bite NIO in the current year. First off, NIO is a $76 billion company that's producing an annual run rate of about 50,000 EVs. Its market cap is larger than some traditional auto stocks that are profitable, have multiple manufacturing lines, can produce millions of vehicles a year, and are investing billions in EV and autonomous innovation. In short, a $76 billion market cap seems like a serious reach.
The other worry is that NIO might face increasing competition from deeper-pocketed peers in China. NIO does have the advantage of being based in China, but it's not exactly blowing the competition out of the water on the production front. It wouldn't be shocking to see the EV bubble burst in 2021.
Image source: Getty Images.
Moderna
Clinical-stage drug developer Moderna (MRNA -1.39%) had an excellent 2020, thanks largely to its coronavirus disease 2019 (COVID-19) vaccine research. Moderna's COVID-19 vaccine, mRNA-1273, was granted emergency use authorization by the U.S. Food and Drug Administration in December after producing a 94.1% vaccine efficacy in late-stage trials. This should lead to multiple billions in sales in 2021.
Though I don't fault investors for their excitement, there are a couple of worries for Moderna going forward. Perhaps the biggest concern is that other developing vaccines may hold an edge over mRNA-1273. In particular, Johnson & Johnson's coronavirus vaccine is administered in a single dose, as opposed to the two doses required or mRNA-1273 (and most other treatments). If J&J's vaccine produces similar efficacy to mRNA-1273 when it releases interim phase 3 trial results later this month, it could make Moderna's vaccine less desirable.
The valuation is also a concern. Most biotech stocks tend to trade at a multiple of 3 to 6 times peak annual sales. Moderna has been well above this range for a while. Even if the company's sales are stellar in 2021, the outlook in future years isn't so bright. As new treatments are approved, Moderna's COVID-19 revenue is likely to shrink.
Image source: Chipotle Mexican Grill.
Chipotle Mexican Grill
In a year that saw restaurants around the country struggle due to the pandemic, fast-casual chain Chipotle Mexican Grill (CMG 0.17%) galloped higher by 66%. Chipotle's focus on fresher and natural foods, along with its willingness to adjust its operating model to incorporate digital drive-thru (Chipotlanes) and delivery options, helped the company navigate the worst recession in decades.
But feel free to call me skeptical of a restaurant industry stock trading at a forward earnings multiple of 65. Even going out three years, Chipotle is still valued at 40 times Wall Street's consensus earnings per share. While the addition of Chipotlanes can be construed as innovation, a multiple of 40 to 65 times forward EPS for a food company is egregiously high. There are far too many external factors, such as food inflation and higher labor costs, which can disrupt this utopian valuation.
History might also suggest that Chipotle is due for a sizable pullback. Over the past 14 years, Chipotle's pattern has been to rocket higher for three to four years, then lose around half of its value. This could happen in 2021 if investors decide to pivot to consumer discretionary stocks that are more fundamentally attractive.
Image source: Getty Images.
MicroStrategy
Another ultra-popular stock that could get creamed in 2021 is enterprise analytics company MicroStrategy (MSTR 1.69%). Though not as well-known as the other companies here, MicroStrategy has made waves in recent months by plowing over $1.1 billion of its cash into cryptocurrency bitcoin. As of mid-December, the business intelligence company owned 70,470 bitcoin at an average price of $15,964 per token. This position is now worth north of $2 billion.
However, bitcoin has a habit of overextending to the upside. The world's largest cryptocurrency has lost more than 80% of its value on a few occasions over the last decade.
It's even easier for me to bet on a significant pullback in MicroStrategy because I'm not a fan of bitcoin. I strongly believe bitcoin lacks game-changing utility and true scarcity, which would both be needed to support a $29,000 value per token. Buying bitcoin gives investors no ownership in the underlying blockchain technology, which is the only thing that might actually have value.
In case you need one more reason to avoid MicroStrategy, sales were down 1% through the first nine months of 2020, with its loss from operations widening 32% to $14 million. This is not a company whose stock should be up 229% in the past six months.
A Tesla Model S plugged in for charging. Image source: Tesla.
Tesla
Last but not least, EV giant Tesla (TSLA -3.55%) is a popular stock that could be stuck in reverse for much of 2021. Tesla shares gained more than 700% last year after increasing EV capacity, raising plenty of additional capital, enacting a stock split, and entering the S&P 500.
Although EVs are the future of the automotive industry, Tesla, like NIO, looks to have entered the fast lane way too quickly. Tesla might have delivered north of 500,000 EVs in 2020, but that hardly seems to justify a $669 billion valuation.
Tesla has yet to prove that it can generate a recurring profit solely from selling EVs. In four of the past five quarters, selling emission credits has allowed the company to report a relatively meager adjusted profit. The margins on EVs aren't anything to write home about, either, which makes Tesla's forward price-to-earnings ratio of 184 absolutely nuts.
I'm also skeptical of Tesla's ability to maintain its competitive advantages over other auto stocks investing tens of billions of dollars into EVs and autonomous technology. It may well be my No. 1 stock to avoid in 2021.
