By Michael Brush
The U.S. stock market will post gains of 7% to 10% next year. Out-of-favor sectors including banking and commercial real estate will be among the best performers. Small- and mid-cap companies will continue to fare best. Value will outperform growth.
It’s safe to own stocks with solid dividend yields because interest rates won’t rise enough to hurt them, despite the expected pickup in growth and inflation. Ten stocks, below, should be among the best performers.
Those are the 2021 predictions of three of my favorite stock letter writers, who I check in with each year for an annual forecast and a short list of favorite stocks.
Investment letter writers are the unsung heroes of the market. They don’t get the attention showered on sell-side analysts and pop-star fund managers. But their thinking can be just as good, or even better.
Of course, I have a bias. I also have a stock letter called Brush Up on Stocks. (See the link in my bio below.) But rankings that these letter writers pay the Hulbert Financial Digest to calculate confirm their long-term records.
Here’s a closer look at what they think lies ahead, and some of their favorite stocks for 2021.
Citing the vaccine rollouts, editor John Buckingham expects life to start returning to normal in 2021, driving gains of around 10% for the S&P 500 /zigman2/quotes/210599714/realtime SPX -2.45% .
He disputes claims that investors are euphoric, citing the $4.3 trillion parked in money market funds, and the $18 trillion in bonds yielding virtually nothing or worse (negative yields). He predicts value will outperform growth because it typically does better as economies improve.
As for individual names, citing just a few goes against Buckingham’s practice of diversifying to reduce risk. But he plays along. Buckingham likes companies that have decent business prospects over the next several years, look cheap and pay generous dividend yields.
For example, Cisco Systems /zigman2/quotes/209509471/composite CSCO -0.48% has a trailing price-to-earnings ratio of around 14, below its historical range of 15-18. But he thinks it will benefit from the rollout of 5G by AT&T /zigman2/quotes/203165245/composite T -2.55% , Verizon /zigman2/quotes/204980236/composite VZ -1.09% , Apple /zigman2/quotes/202934861/composite AAPL -3.48% and Alphabet /zigman2/quotes/205453964/composite GOOG -3.05% /zigman2/quotes/202490156/composite GOOGL -3.26% , among others.
Buckingham believes consumers will go for 5G to better view entertainment from content kings like Viacom /zigman2/quotes/200340870/composite VIAC -4.73% and Walt Disney /zigman2/quotes/203410047/composite DIS -3.31% . Cisco’s network switching equipment will play a big role. It pays a 3.2% yield.
Next, he likes CVS Health /zigman2/quotes/209664499/composite CVS -1.52% as a contrarian play on exaggerated fears that Amazon.com /zigman2/quotes/210331248/composite AMZN -3.24% will move into the pharmacy business. Shares trade at just 10 times earnings, and CVS pays a 3% yield.
Also consider General Dynamics /zigman2/quotes/208560027/composite GD -1.11% . It gets about 70% of its sales from defense contracting, but there is a private sector kicker in the mix, in Gulfstream business jets. General Dynamics looks relatively safe given its $81.5 billion backlog. It pays a 3% yield.
In banking, Buckingham suggests J.P. Morgan Chase /zigman2/quotes/205971034/composite JPM -1.36% , which he describes as a quality bank that merits a premium valuation. The bank will benefit as the yield curve turns more upward sloping because the economy will strengthen. Meanwhile, it is well-reserved with a strong balance sheet. This leaves a lot of room for buybacks and dividend hikes. It pays a 2.9% yield.
He also singles out ManpowerGroup /zigman2/quotes/200637338/composite MAN -2.28% , a play on a European rebound since it gets about two-thirds of its revenue there. Staffing companies also tend to do well as economies recover. Buckingham thinks earnings will double by 2022. It pays a 2.6% yield.
Editor Kelley Wright is skeptical of predictions of fast economic growth for 2021 because unemployment remains elevated. “But if there is acceptance of the vaccine and the virus gets under control, it will be a tremendous positive, especially for consumer sentiment,” he says. “I think the S&P 500 will figure out a way to produce the usual 8% to 10% gains.”
That wouldn’t match this year’s gains of 15.6% for the S&P 500. But it would be a healthy advance nevertheless.