The 21 best stocks to buy for 2021

Call it a comeback. Many of the best stocks to buy for 2021 are heavily tied to economic recovery prospects as the world fights back against COVID-19.

  • By Anne Kates Smith, Charles Lewis Sizemore, CFA, James K. Glassman,
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The stock market always has a few surprises in store, as any investor in 2020 would attest. But by and large, the biggest factor experts are considering as they identify the best stocks to buy for 2021 is the same factor that dominated 2020:

COVID-19.

2020's top stocks typically were tied to companies that benefited from new and accelerated trends resulting from COVID-related lockdowns. However, many of the best stocks for 2021 are largely expected to benefit from a "return to normalcy" and a healing economy.

"Continued progress in the response to COVID-19, including further stimulus, will be the key to sustaining the recovery," writes LPL Financial, a retail investment advisory firm, in its 2021 outlook. "An earnings rebound in 2020 and strong earnings growth in 2021 may allow stocks to grow into somewhat elevated valuations. Cost efficiencies achieved during the pandemic may persist."

Exactly when during 2021 you can expect to see these gains is another story altogether. That hinges on issues such as when and if the government will produce a stimulus bill, and how long it will take vaccines to be distributed, among others. In some cases, it might be a wait. "COVID-19-impacted service industries may be the last to bounce back," LPL Financial adds.

Here, then, are the 21 best stocks to buy for 2021. A few of these stocks have been bulldozers for a long time and simply look primed to continue their success for yet another year. Many more of these stocks are clear "recovery" plays that took it on the chin for much of 2020, but are largely expected to turn things around in 2021.

Data is as of Dec. 9. Stocks listed in reverse order of yield. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.

PayPal Holdings

  • Industry: Credit services
  • Market value: $247.0 billion
  • Dividend yield: N/A

In September, Will Danoff celebrated 30 years managing Fidelity Contrafund (FCNTX). His recent performance has not been spotless. The fund, with $125 billion in assets, has failed to beat its large-company benchmark in two of the past five years.

But James Glassman – contributing columnist for Kiplinger's Personal Finance and a visiting fellow at the American Enterprise Institute – is not counting Danoff out. His long-term record is what counts, and it is brilliant. For example, Danoff bought PayPal Holdings (PYPL), the digital payment company, in 2015, the year it was spun off from eBay (EBAY).

Since then, the stock price has more than quintupled, but Danoff hasn't cashed out yet – he bought more in 2020.

Consider PayPal among the best stocks to buy for 2021 and beyond.

Castle Biosciences

  • Industry: Diagnostics and research
  • Market value: $1.2 billion
  • Dividend yield: N/A

Glassman also has been looking closely at the portfolio of Wasatch Ultra Growth (WAMCX), a fund bucking the trend by returning an incredible annual average of 26.6% over the past five years.

Wasatch is making a big bet on health care, at more than a third of the fund's assets right now. One of those bets is Castle Biosciences (CSTL), a company headquartered outside Houston that has developed proprietary tests for skin and eye cancers.

Castle shares began trading only a year and a half ago and have since shot up 262% from their initial public offering (IPO) price of $16. But Wasatch continues to add to its holdings, and CSTL now ranks among the fund's top 10 stocks to buy at 2.4% of AUM.

IEC Electronics

  • Industry: Electronic components
  • Market value: $121.9 million
  • Dividend yield: N/A

Small-company stocks have been out of favor for at least six years, but there are still gems to mine.

Dan Abramowitz, whose Rockville, Maryland-based firm Hillson Financial Management specializes in such stocks, found a major winner in 2020 in Chemours (CC), a maker of refrigerants and other chemicals that has delivered a total return (price plus dividends) of 56.9% through early December.

For 2021, he likes IEC Electronics (IEC), with a market capitalization (shares outstanding times price) of just $122 million. IEC specializes in devices for the medical and defense sectors, and business has been booming.

Abramowitz says he expects "some moderation in growth rates," but earnings should rise by double digits, and the price is right.

Based on Abramowitz's earnings forecast for the year ahead, shares trade at a price-to-earnings ratio of 15, and profits "could surprise to the upside."

IEC also belongs among the best stocks to buy for 2021 because of its potential as a takeover target.

Hilton Worldwide Holdings

  • Industry: Lodging
  • Market value: $29.6 billion
  • Dividend yield: N/A

Hilton Worldwide Holdings (HLT) is a bet on a post-COVID recovery.

"Demand will pick up as the pandemic fades," says Matt Gershuny, comanager of Parnassus Mid Cap (PARMX), who recently bought shares in the hotelier.

There's no denying the virus's damage to Hilton, on track to report a 50% decline in sales and a 64% drop in earnings for 2020. Revenue per available room was $47 in late 2020, down from $102 in 2019.

But Wall Street analysts expect earnings to gain ground in 2021. And a cash pot of $3.5 billion will see Hilton through.

Alibaba Group

  • Industry: Internet retail
  • Market value: $713.7 billion
  • Dividend yield: N/A

Glassman is interested in the big, new stake that Matthews China (MCHFX) took in global e-commerce giant Alibaba Group (BABA).

At 11.1% of assets under management (AUM), Alibaba is now the fund's second-largest holding, behind Chinese tech conglomerate Tencent Holdings (TCEHY).

Alibaba is booming: Revenues have more than tripled in three years. The stock is booming, too, but its continued upside potential makes it one of the best stocks to buy for 2021.

Glassman also notes that he still likes his 2020 pick, Trip.com (TCOM). The online travel agency's outlook quickly sank early in the year as the COVID-19 pandemic emerged, and while it recovered to small gains, it trailed the broader Chinese markets by a wide margin. Its fortunes look much better, however, heading into 2021.

Pinterest

  • Industry: Social media
  • Market value: $42.3 billion
  • Dividend yield: N/A

Pinterest (PINS) is a social-networking app that allows users to share images grouped by keywords. Generally speaking, the user experience is about finding and providing inspiration.

Pinterest makes money from advertising. Its new ad technology platform, in partnership with Shopify (SHOP), allows advertisers to upload catalogs to Pinterest. Users can buy items with just a few clicks – a development Baron Opportunity (BIOPX) fund manager Michael Lippert says will transform Pinterest's business. He thinks the shares could gain 25%, on average, over each of the next four years.

Pinterest still operates in the red, but it could be one of the best stocks to buy for 2021, when Wall Street analysts expect it will start generating profits.

Twilio

  • Industry: Internet content and information
  • Market value: $50.2 billion
  • Dividend yield: N/A

Twilio (TWLO) enables businesses to integrate text, chat, email, voice and video into products that boost customer engagement – automatic text notifications for appointments, say, or communication between Instacart shoppers and hungry families.

Twilio benefits from the accelerated digitization of business brought on by the pandemic, and it is diversifying its customer base.

Though profits are still scarce as Twilio invests in growth, the communications firm is "well positioned" to meet sales-growth targets of 30%-plus in each of the next four years, says Canaccord Genuity, which rates the stock a Buy.

Upland Software

  • Industry: Application software
  • Market value: $1.3 billion
  • Dividend yield: N/A

Once again, Terry Tillman, an analyst with Truist Securities (formerly SunTrust Robinson Humphrey), came through big-time. Glassman's annual selections from Tillman's Buy recommendations have beaten the S&P 500 now for nine years in a row. His 2020 choice, Okta (OKTA), has more than doubled through early December.

For 2021, Glassman likes his choice of Upland Software (UPLD), based in Austin, Texas, which offers digital tools for companies to manage their customer base.

This small cap might be one of the best stocks to buy for 2021, but it's risky. Namely, profits are still elusive. However, Upland has more than 10,000 customers, and revenues rose in the most recent quarter by 35% over the same period last year.

Wayfair

  • Industry: Internet retail
  • Market value: $23.9 billion
  • Dividend yield: N/A

Internet home goods retailer Wayfair (W) beat expectations for results in the most recent quarter by almost any measure.

Deutsche Bank, which rates the shares a Buy, sees near- and mid-term revenue growth being driven by a larger customer base – Wayfair has 10 million more active customers than it had a year ago. Repeat order volume as a percentage of total orders is now 72%, up six percentage points from the third quarter of 2019.

Longer-term, accelerating store closures in a fragmented industry will drive more sales online.

Deutsche Bank sees the shares at $325 to $350 over the coming year. That equates to a 12-month return of 35% to 40%, which certainly would put Wayfair among 2021's best companies to invest in.

Microsoft

  • Industry: Infrastructure software
  • Market value: $1.6 trillion
  • Dividend yield: 1.1%

Among the hundreds of stocks analyzed by Value Line Investment Survey, very few are awarded a top ranking in each of three categories: timeliness, safety and financial strength.

One is Microsoft (MSFT), the world's largest software maker.

Microsoft's earnings were in a rut between 2011 and 2017, but since then, they have nearly doubled. A big reason is cloud computing, which has become the firm's largest source of revenues.

Value Line forecasts Microsoft's earnings to increase by an average of 15% for the next five years – nearly double the rate of the past five. The stock also throws off a modest amount of income via its 1.0%-yielding dividend. If you're looking to pad your portfolio with blue chips, MSFT could be one of 2021's best stocks to buy.

Stryker

  • Industry: Medical devices
  • Market value: $88.7 billion
  • Dividend yield: 1.1%

Stryker's (SYK) medical devices range from implants used in joint replacements and spinal surgeries to surgical equipment and navigation systems.

Analysts at Canaccord Genuity say Stryker should be "a core position for growth-oriented investors."

New-patient demand remains in question as long as COVID-19 infection rates remain high, but hospitals are adapting their infection-prevention protocols, and the rate of elective procedures has started to accelerate. Strong markets include the U.S., Australia, Germany, Canada, and especially China.

Argus Research analysts rate the stock a Buy and see the stock hitting $265 per share over the next 12 months.

Tennant

  • Industry: Specialty industrial machinery
  • Market value: $1.3 billion
  • Dividend yield: 1.3%

Tennant (TNC) produces professional-grade floor scrubbers.

Shares were still roughly 10% in the red as of early December, but demand for its robotic, "autonomous" scrubber is growing. Walmart (WMT) bought 1,400 last March, and the company's Sam's Club division said it would install one in each of its 599 stores. At $60,000, the scrubbers cost four times as much as a human-powered one, but the savings in labor costs are huge.

"Other retailers are looking at the scrubber, too," says Mairs & Power Growth (MPGFX) fund comanager Andy Adams.

Following a tough 2020, Wall Street analysts expect 19% earnings growth in 2021. That should help put it among good stocks to hold on to for the year to come.

United Parcel Service

  • Industry: Integrated freight and logistics
  • Market value: $146.2 billion
  • Dividend yield: 2.4%

UBS Securities recently raised its rating on package delivery giant United Parcel Service (UPS) from Neutral to Buy. The brokerage sees the potential for price hikes in 2021, given capacity limitations in the industry generally. And cost-cutting efforts at UPS are boosting profit margins.

UPS can succeed in multiple pandemic scenarios. A vaccine-supported economic snapback is the best case, leading to a strong rebound in business-to-business deliveries. But even a more prolonged recovery would support strong e-commerce sales, a plus for UPS.

The brokerage has a 12-month price target for the shares of $210, giving UPS a chance to be one of the best stocks to buy for 2021 after a fruitful 2020.

Bank of America

  • Industry: Diversified banks
  • Market value: $249.1 billion
  • Dividend yield: 2.5%

Banks have been something of a dirty word ever since the 2008 meltdown. The sector was largely responsible for all that transpired, and many Americans believe the banks were never truly held accountable for the mess they made. Investors have been reluctant to return to the sector, believing that banks may never again be as profitable as they were prior to the global financial crisis.

Then COVID-19 happened.

The prospect of a wave of bankruptcies stemming from the COVID recession caused already timid bank investors to run for the doors again.

But here's the thing. Banks today are the healthiest they've been in a long time. The COVID recession wasn't as damaging to the banks as initially feared, due in part to support from the Federal Reserve. They've also been deleveraging for over a decade, and derivatives trading is no longer the systematic threat it once was. Lousy investor sentiment toward the sector would seem to be overdone.

This brings us to Bank of America (BAC). BAC's shares have been rallying hard since March, yet they still remain at 2017 levels. It's as if the great market boom of the past four years never happened.

In a market starved for value, financials could be among some of the best stocks to invest in during 2021. As one of the largest banks in the world, BAC stands to capitalize on that trend.

Intel

  • Industry: Semiconductors
  • Market value: $205.2 billion
  • Dividend yield: 2.6%

A huge winner in 2020 was Nvidia (NVDA), maker of microprocessors for applications such as artificial intelligence and PC gaming. Returning 120% through early December, it was a standout in the portfolio of Jerome Dodson's Parnassus Endeavor (PARWX).

Dodson, a value maven, has lately been scooping up shares of another chipmaker, Intel (INTC), which moved in the opposite direction of Nvidia in the past year, falling 16.3%.

Intel looks like an unusual tech bargain, however, with a forward price-earnings ratio of 11 and a 2.6% dividend yield.

JPMorgan Chase

  • Industry: Diversified banks
  • Market value: $369.0 billion
  • Dividend yield: 3.0%

Shares in JPMorgan Chase (JPM), the financial services giant, have fallen 13% in 2020. The stock trades on par with the typical big bank – a bargain for "the best of the best" of banks, says John Buckingham, editor of The Prudent Speculator newsletter.

Low interest rates have reduced the bank's net interest income – the difference between the interest it earns from lending money and what it pays depositors. But record revenues in 2020 from investment banking and trading have been a boost.

JPM is well positioned for an economic rebound, and could join Bank of America as one of the best stocks to buy for 2021.

While you're waiting for that rebound, collect 3.0% in dividends from this U.S. mega-bank.

LyondellBasell

  • Industry: Specialty chemicals
  • Market value: $29.6 billion
  • Dividend yield: 4.7%

LyondellBasell (LYB) had a brutal 2020, never sniffing a positive return from day one. It's primarily in the business of selling plastics and petrochemicals, but it also has a large refinery business that makes gasoline, diesel fuel and jet fuel.

In a normal world, this would have been considered a diversified business model. But in 2020, investors spent most of this year scared to death of anything resembling energy.

Chemical companies are cyclical in nature, as are refineries. They tend to do well when the economy is humming. So, it's not too surprising that LyondellBasell got beaten up in March. But what is surprising is the sheer magnitude of the fall. Before the dust settled, the stock had fallen by about two thirds from its 52-week highs.

The shares bottomed out in late March and by early December had clawed back most of their losses for the year.

But here's the thing. The shares were cheap before the March selloff, and they remain cheap today. The stock trades 1.1 times sales and 13 times expected 2021 earnings. To put that in perspective, the S&P 500 trades at an almost shocking 2.7 times sales and 22 times expected 2021 earnings.

As we finish up 2020, value stocks appear to be assuming leadership from growth stocks. We'll see if this is a blip or if it represents a sustained shift in sentiment. But regardless, LYB is a cheap stock showing strong momentum, and that puts it on strong footing to be one of 2021's top stocks.

Dow

  • Industry: Chemicals
  • Market value: $40.5 billion
  • Dividend yield: 5.1%

Along the same lines, Dow (DOW) looks like an excellent stock for 2021.

As was the case with Lyondell, Dow really struggled for most of 2020, trending lower with commodity prices. But that never really made a lot of sense. Dow actually benefits from lower commodity prices, specifically natural gas. Dow uses natural gas as its primary feedstock, whereas most of its competitors use crude oil.

Well, natural gas prices are dirt-cheap in America, particularly relative to crude oil, and that's not likely to change anytime soon given the abundance of shale gas.

It's normal for a chemical company to trade at a discount to, say, a software company. Chemicals tend to be a relatively low-margin, commoditized business. There's just nothing sexy about them.

But Dow's underpricing relative to the broader market is absurd. It trades for 1.1 times sales, in line with LYB's ratio.

Dow has been ripping higher since March and recently hit new 52-week highs. But it could be one of the best stocks to buy for 2021 because, as the world starts to look a little more normal next year, that trend should continue.

And even if the shares start to lose some of that momentum, we're still getting an attractive 5%-plus dividend yield while we wait for the capital gains to materialize.

Enterprise Products Partners LP

  • Industry: Oil and gas midstream
  • Market value: $45.1 billion
  • Dividend yield: 8.6%

To say that 2020 was a tough year for energy stocks would be gross understatement. This was the year that saw the price of a barrel of crude oil drop to negative $37.63, for crying out loud.

But the carnage in midstream oil and gas pipelines was especially brutal. Even best-in-class blue chips like Enterprise Products Partners LP (EPD) got seriously beaten up; EPD lost about two-thirds of its value at its nadir. Shares have since doubled off their 52-week lows but remain down by nearly 30% from their pre-pandemic highs.

The pain in this sector never made sense. Enterprise in particular is primarily a natural gas and natural gas liquids pipeline operator and has little exposure to crude oil. Furthermore, about 87% of its revenues are fee-based and no exposure to fluctuating commodity prices. It would seem that the damage in this space is a case of the baby being thrown out with the bathwater. Investors dumped anything resembling energy with no respect for fundamentals.

As investors look for bargains in an otherwise pricy market, they'll come back to Enterprise Products. It owns a sprawling network of energy infrastructure it would take decades to duplicate, and new competition will likely dry up next year. The incoming Biden administration will be a lot less friendly to new pipeline construction, which paradoxically helps established players like Enterprise Products.

We'll see how EPD fares in 2021. And while we wait, we can collect its market-crushing 8.6% distribution paid in cold, hard cash.

Ares Capital Corporation

  • Industry: Asset management
  • Market value: $7.3 billion
  • Dividend yield: 9.3%

Virtually everything got slammed in March. But high-yield sectors such as business development companies (BDCs) got hit particularly hard by the COVID pandemic and the social distancing that followed.

BDCs are about as close to Main Street as Wall Street gets. They provide debt and equity financing to middle-market companies that are a too big for a bank loan but generally too small to effectively raise money in the stock or bond market.

But that's what makes business development companies interesting in 2021. As life gets closer to normal, BDCs should bounce back in a big way.

Ares Capital Corporation (ARCC) is the world's largest BDC with a market cap of a little over $7 billion. It's also one of the more conservatively allocated – 73% of its portfolio is invested in first and second-lien loans, meaning that Ares is first in line to get paid.

The current dividend yield, at more than 9%, is enough to make your mouth water. Ares technically never lowered its regular dividend, which was 40 cents per share in 2019 and remained there this year. However, it stopped paying the additional 2-cent "top-up" dividends it paid every quarter in 2019, effectively reducing its dividend by less than 5%.

As business conditions improve, expect to see Ares push the dividend back to pre-COVID levels in a hurry, then keep raising it from there.

Oneok

  • Industry: Oil and gas midstream
  • Market value: $17.9 billion
  • Dividend yield: 9.3%

Glassman's final pick is Oneok (OKE), a 114-year-old Tulsa natural gas refining and pipeline company that, at a yield of 9.3%, is tied for the most generous dividend payer on this list of 2021's best stocks to buy.

Oneok has had problems in 2020, but things are looking up. OKE kept its generous dividend intact in its October 30 payout, and earnings for the most recent quarter rose 14% compared with the same period last year.

But the stock remains at roughly half of its price at the start of 2020. You can see why he's enticed.

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© 2020 The Kiplinger Washington Editors, Inc.
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