If I Had to Own Only One Stock Going Into 2021, This Would Be It
One of the greatest investing dictums was coined by legendary stock picker Warren Buffett. “It’s only when the tide goes out,” said Buffett, “that you learn who has been swimming naked.” In other words, there are certain companies that can paint a nice picture of their earnings prospects when the market is hot. But then along comes a recession, and a bear market, and those same companies start to reveal their true colors.
The inverse is also true. During economic recessions, when market volatility starts to pick up, genuinely strong companies hold their ground nicely. Even when the tide goes out, real market leaders show they’ve been swimming fully clothed.
During the COVID-19 lockdowns this year, the U.S. economy was sent spiraling down into a severe recession. With the travel restrictions, the forced lockdowns, and the interruptions to supply chains around the world, many companies large and small were not able to hit their earnings estimates. The S&P 500 sank 35% as the economy plunged into recession. Fortunately, thanks to the Fed’s intervention and a slowdown in the infection rate, the recession was short-lived, and most companies survived. But there were a handful of companies that hardly flinched during the crash, and which are now operating at or near all-time highs.
This subset of economic powerhouses are the true leaders of the economy as we head into 2021. This short list of thriving corporations with recession-proof business models ought to be on the radar of every active investor looking for the “best pick” for the coming year.
There is one company leading that pack and which should do extremely well in 2021. If I were only able to buy one company now, and had to hold it throughout 2021, it would be this one: Amazon.com (AMZN).
We all know the story of the online bookseller, founded in Seattle back in 1994, whose massive success ushered the founder, Jeff Bezos, to the top of world’s richest-people list. And we all know that Amazon now sells far more than just books and is much more than a play on retail. In addition to its own line of electronic products — Kindle, Fire tablets, Fire TVs, Echo, etc. — and publishing house, the company has morphed, through its Prime subscription service, into a streaming content producer and delivery portal. But there are also a number of other verticals that Amazon is developing, and it is these that make the stock such a smart play for 2021.
First, let’s take note of the fact that, despite a horrid year of economic contraction, Amazon’s retail footprint has grown and become more efficient. In 2020, in response to the massive online-shopping boom brought on by the pandemic, Amazon aggressively built 33 new, state of the art fulfillment centers through September. These automated “smart-warehouses” are where orders are picked out, packed up, and shipped (much of which is done by robotics). Amazon expects to end 2020 with 410 million square feet of fulfillment center operations, a full 80% more than a year ago.
There is a strategic purpose to this increase in capacity: through its Prime-Whole Foods partnership, Amazon wants to be the king of same-day grocery delivery. Groceries are a $700 billion market in the United States and Amazon is already outpricing its main competitor in the space — Walmart Plus — by boasting nearly 20 times as many products, with the added perk of streaming video (absent Walmart’s perk of fuel discounts) for members.
“Heading into 2021, as demand starts to shift to grocery and discretionary items, we expect Amazon will be able to meet its goal of accelerating Prime delivery to one day and grocery delivery to several hours,” wrote 5-star Mizuho Securities analyst James Lee. Lee has issued 27 ratings on AMZN. Fully 92% of them produced wins for an average 12-month gain of 44.1%.
In addition to the grocery space, Amazon is now entering the $350 billion market for prescription drugs. On November 17, Amazon launched Amazon Pharmacy. This new unit will offer Amazon Prime members discounts up to 80% on generics and 40% on branded prescriptions. A recent survey of 1,100 adults by analyst firm Jeffries revealed that 55% of respondents said they would “likely” or “very likely” try this new Amazon service, with 45% saying they would consider making it their primary source for medications.
“Even modest penetration of the pharmacy market would give Amazon another multibillion high-margin business, while providing a platform for other consumer health care initiatives,” 5-star Jefferies analyst Brent Thill said in a note to clients. Thill has issued 43 ratings on AMZN, 80% of which were successful for an average annual gain of 31.1%.
A third area of competitive advantage for Amazon as it enters 2021 is its clear lead in cloud computing services. Even huge players like Microsoft and Google (Alphabet) cannot match the revenues generated by Amazon’s Web Services unit. Amazon’s revenue from AWS, which provides on-demand cloud-based platforms and APIs to end-users of all types, is expected to climb 37% in 2021 to $62.4 billion.
A fourth growth vehicle for Amazon in 2021 is advertising. Amazon has now become the default search engine for many people. About half of U.S. adults start their product search with Amazon. More searches draw more advertisers. And as COVID-19 has caused more consumers to shop online, that will keep Amazon’s ad growth steadily improving. Wall Street sees Amazon’s ad revenue in 2021 ticking north of $26 billion, up 37% over projected numbers for 2020.
These are four reasons why analysts are bullish on Amazon’s earnings estimates for 2021. Amazon stock is up about 80% over the past 12 months as we close out 2020, spurred on by the work-from-home and shop-from-home waves in full crest. But the tsunami of revenue growth is still on the horizon and should come nicely into play in 2021.
Action to Take: I like shares of AMZN for your blue-chip growth portfolio up to a price of $3,250, with a view to selling at either $4,500 or the end of 2021, whichever comes first