Investors went on a wild ride in 2020. Inventories were initially hit hard by the COVID-19 pandemic, but then increased as the year progressed. Stocks apparently braved gravity, or could at least look past the significant economic hardship causing the pandemic.
The new year offers the promise of a vaccine, which will hopefully bring life back to normal and eventually lead to an economic recovery. Three contributors to Motley Fool believe AerCap Holdings (NYSE: AER), Ford Motor (NYSE: F), en Carnival (NYSE: CCL) (NYSE: CUK) are shares worth buying for the economic downturn.
Image Source: Getty Images.
The best way to invest in a travel recovery
Lou Whiteman (AerCap): Airline was hit hard during the pandemic, and shares relying on the airlines for revenue fell along with the airline. AerCap, which buys aircraft and leases them back to airlines, was among the victims. The company’s shares lost nearly 75% of their value during the early days of the pandemic, as investors feared that those businesses that could not pay their bills would go bankrupt.
Investors underestimated the strength of AerCap’s balance sheet. The company was forced to incur more than $ 1 billion in costs to write off the value of its aircraft portfolio, and has deferred more than $ 350 million in lease payments for heavily drawn customers. But at the end of the September quarter, AerCap still had more than $ 11 billion in total liquidity and $ 25 billion in untaxed assets to borrow against when things got worse.
With the advent of the vaccine, things should not get worse from here on out. Airlines are going to need years to rebuild their bruised balance sheets, but with each passing month, travel demand should increase slightly as the vaccine widens. While this is not enough to ensure that the airlines will be profitable in 2021, it should be enough to enable them to pay their bills, which means that AerCap will see that business will return to normal before the trip again. going to the pre-pandemic levels.
AER versus market data by YCharts
If anything, airlines that have incurred billions in debt to survive the pandemic are likely to be more focused on leasing planes after the crisis instead of buying them and placing the extra debt on their balance sheets. Yet AerCap shares are lagging behind the broader markets, and are currently being recorded US World Aircraft exchange traded fund (ETF) with airline so far.
The market has this one wrong. If you believe that travel demand will eventually return – and I do – AerCap should gain considerable ground in the coming quarters.
Why could Ford be the growth in the car next year?
John Rosevear (Ford Motor): I know the idea of investing in Ford may seem a bit silly to growth-minded investors who are still crazy about their Tesla profits over the past year. Keep me here, because there are two good reasons why Ford could be a surprising market beater in 2021.
First, with large carmakers, stock prices tend to follow sales – and car sales tend to bounce early in economic recovery. The recovery to COVID will not be exactly the same as a typical recovery after the recession, but the recovery in consumer and business confidence should boost sales of cars, trucks and SUVs by 2021.
Who is Tesla? Ford’s own electric hot rod, the much anticipated Mustang Mach-E, is on its way to dealers for COVID recovery at the right time. Image source: Ford Motor Company.
Second, Ford’s inventory outperformed most other automakers during the year last recovery (2010-2011) because the Blue Oval had good, fresh produce in the retailers’ showrooms just when buyers returned – and while competitors were catching up. This may also be true this time.
Ford’s brand new 2021 F-150 pickup, the brand new Bronco Sport SUV, and (speaking of Tesla) the new electric Mustang Mach-E, have all just been shipped to dealers. The timing couldn’t be better: the F-150 is Ford’s top seller, and the other two are the kind of vehicles that bring curious consumers into showrooms.
There are still 2021 to come, including the much-anticipated new Bronco, a refreshed version of Ford’s big Expedition SUV and a brand new small pickup truck that could be called the Maverick. A little further on, we expect new electric versions of the F-150 and the large Transit commercial van, as well as a brand new (non-electric) Mustang.
Ford’s inventory has slipped over the past few years as its product portfolio has long fallen into disrepair. It did not help that Ford cut its dividend early in the pandemic, when the outlook was bleak. But now Ford’s product pipeline looks strong, just as an end to the pandemic is in sight. If the following quarters go well, the dividend can be reinstated somewhere next year. That’s all good for Ford shares in 2021.
To buy cruise lines before they return to normal
Rich Smith (Carnival): Coronavirus has devastated the U.S. cruise industry, limiting 75% of the year in port under ‘no sail’ orders issued by the Centers for Disease Control (CDC). Even the advent of a ‘conditional sail’ framework at the end of October has not ended the pain of the industry, as so far no one is sailing out of the US.
At the end of 2020, the shares of Carnival – the largest company in the industry – are 53% lower than where they were a year ago. But that could all change in 2021.
Already here and there, cruise lines are preparing to run a ‘simulated trip’ without passengers to earn CDC certificates that enable them to return to their business. In anticipation of this, cruise lines will begin at least short-duration cruises, such as the 18 Canada-to-Alaska trips planned by Carnival in May 2021.
Not coincidentally, May (or June or July) are the months that are mostly indicated as the time when most Americans who want to be vaccinated against the coronavirus will be vaccinated, which reduces the health risks of speeding. If all goes well, it should start back to normal for Carnival in the second half of the year.
What will “back to normal” look like? Let’s assume, for example, that in 2022 Carnival could do something closer to the business level it had in 2019. That would mean $ 21 billion in revenue and $ 3 billion in profits. At a recent market capitalization of $ 24 billion, Carnival would only be valued eight times its earnings – approximately half the stock’s average price-to-earnings ratio over the past ten years, according to data from S&P Global Market Intelligence.
In other words, I see the potential that the Carnival stock will be around double in price next year as investors start looking forward to what it can earn in 2022. I think that could make Carnival Corporation’s share in 2021 a big winner.