The stock market had a good 2020, with the S&P 500 up 16.3%. Cryptocurrency bitcoin, on the other hand, was up more than 300% for the year. In the last month alone, Bitcoin's price has more than doubled.
But bitcoin's incredible rise may mean that a fall is imminent. With that in mind, we asked three Motley Fool contributors for their top stock picks that didn't have big rises in 2020 and look undervalued right now. They came back with Corteva (NYSE:CTVA), General Electric (NYSE:GE), and Dow (NYSE:DOW). Here's why they think these stocks have better prospects than bitcoin.
Harvester of joy
Lee Samaha (Corteva): The world is always going to need more food, and farmers are always going to need to improve crop yields and protect their harvest. That's where Corteva comes in. Created out of the breakup of DowDuPont, it's a play on long-term demand for food crops and also a value stock in the making.
The agriscience company generates around 59% of its revenue from seeds (of which 68% is from corn and 21% from soybean) and 41% from crop protection (51% from herbicides and 27% from insecticides). Long-term demand for higher-yielding seeds is assured given the need to feed a growing population and to increase profitability for farmers. For example, U.S. corn yields have gone up from around 108 bushels per acre in 1990 to around 176 bushels per acre in 2020. It's a remarkable achievement which shows how valuable higher-yielding seeds, such as Corteva's, are to farmers around the world. In addition, if a crop is going to be harvested then it will need protection.
Corteva has attracted the interest of an activist hedge fund, Starboard Value, whose case for buying the stock is based on the potential for Corteva to improve profit margins to the level of its peers. In fact, Corteva is making progress on that front with its earnings before interest, depreciation, and amortization margin rising to 16.8% in the first nine months compared to 16.2% in the same period last year.
Trading at 24 times next year's estimated earnings, Corteva's end markets are relatively stable and the potential for margin expansion is substantial. It's not a glamorous stock, but Corteva's earnings growth potential is significant, and it's the sort of overlooked stock that investors should be considering right now.
A general idea to get charged up about
Scott Levine (General Electric): Bitcoin's recent performance probably has long-term holders feeling vindicated -- and a lot richer. Those who have hesitated to buy the cryptocurrency, however, are likely reluctant to begin investing now, dubious that there's more growth on the horizon. Fortunately for them, there are plenty of investing opportunities that offer much more reasonable valuations, such as General Electric.
Tumbling more than 3% in 2020, shares of GE vastly underperformed the market. Over the past month, GE's stock has inched up about 3.5% higher, but I think the market is underestimating the company's potential in 2021 and beyond. Investors, consequently, can pick up the stock on the cheap as shares are trading hands at 14.8 times operational cash flow -- a considerable discount to their five-year average multiple of 21.1.
Granted, there are plenty of bears who believe that GE will continue to stagnate in 2021. But while they're fearful that the company may not prosper, investors willing to take a contrarian approach should heed Warren Buffett's advice and be greedy when others are fearful. Although it's highly unlikely that GE's aviation business will fully recover in 2021, the company's renewable energy business will likely benefit from the recent stimulus bill that has sent many renewable energy stocks soaring over the past few weeks. An industry leader in wind turbine manufacturing, GE will surely benefit from the legislation that benefits the wind industry: a one-year extension of the Production Tax Credit for wind power projects that begin construction in 2021 and a 30% tax credit for offshore wind projects that begin construction in the next five years. Besides wind power, GE may benefit from the more than $2 billion allocated for grid modernization.
While GE is a long way from returning to its former glory of generating annual free cash flow of $26 billion like it did in 2010, the company has made progress in bouncing back from its declining cash flow in the middle of the last decade.
There may be a rocky road for GE in the near term, but the company's backlog -- including $262 billion for the aviation segment and $384 billion for power and renewables -- suggests that its products and solutions remain in demand. And as the company is now on firmer financial footing, I think GE represents an interesting opportunity for patient investors who are willing to look at the company in a new light -- not as a shadow of its former self.
A reliable cash machine
John Bromels (Dow): I'm not going to lie to you: Bitcoin could continue its astonishing rise. It could, as some bitcoin bulls have suggested, be valued at $250,000 by the end of 2023. However, it's also very possible that its value could plunge and those who buy in now could see their investments evaporate. After all, volatile bitcoin has no earnings, no cash flow, and no business model to evaluate -- it's worth whatever people think it's worth.
I'm not saying you shouldn't buy bitcoin at these prices. But if you do, you should probably balance that risk with a company that has a business model that's stood the test of time, generates reliable cash flow, and looks undervalued at the moment. One such business is Dow Chemical. It's one of the other companies that was spun off from DowDuPont. However, while Corteva kept the conglom's agribusiness portfolio, Dow held onto the "performance chemicals" side of the business.
Performance chemicals are, basically, chemical products that aren't sold on their own, but are used as parts of other products or processes. Think lubricants for industrial machinery, or automobile coatings, or packaging for pharmaceuticals. This diversified portfolio has allowed Dow to reliably crank out cash. Even during the height of the pandemic, in the second quarter of 2020, it generated more than $1 billion in cash flow. It uses that cash to pay a generous dividend, currently yielding 4.8%.
Despite this reliability, Dow underperformed the broader market in 2020, even with its dividend factored in. Wall Street seems to have been concerned about the pandemic's effect on manufacturing and auto sales, big markets for Dow's chemicals. However, we've already seen those markets begin to recover, which is why I think Dow will outperform in 2021.