And here are some companies to consider from each theme

It is a New Year, and the markets are trying to figure out what to do. Does tech still run? Is it time for value stocks to finally shine? Is the bull market going to end, or is it just getting started?

Already, in just five days, 2021 has shown it is not going to be boring. We started off the week with five or six takeovers or privatizations, had a quick market slump and then a quick rally, and, oh yeah — a riot or insurrection, depending on who you ask — in Washington. Meanwhile, the zombie virus keeps mutating and shutting down the world and killing people. No wonder there is a risk premium on owning equities!

Here at 5i Research/i2i Fund, we spend very little time though looking at such things. We like to look at companies. A great company is still going to be a great company, even in a bad economy. A great company doesn’t really care who is in the White House. A great company has a longer time frame than a pandemic.

Still, let’s look at some 2021 themes in the market that may be developing right now, and we will highlight one or two companies from each theme. Some of these may end up great, some may not.

Renewable energy

This is a carry-over theme from last year, but with Joe Biden as U.S. President we doubt the theme is going away any time soon and it may even accelerate. Investors have gone gaga for stocks in the sector, selling carbon-based energy companies to raise funds for the faster growth in renewables. How to play this? In Canada, Brookfield Renewable (BEPC on TSX) has been a star performer. In the U.S., solar stocks have been huge winners, with companies such as Solaredge (SEDG on Nasdaq) up 242 per cent in the past year, and up nine per cent in the first three days of 2001.

Internet gambling, sports and otherwise

It is no secret that governments are going to need revenue, and legalizing gambling is one of the simplest ways to get it. This week, gambling stocks such as Draftkings (DKNG on Nasdaq) soared after New York Governor Andrew Cuomo indicated he planned to make online sports betting a central part of his policy proposals. DKNG stock rose nine per cent on Wednesday alone, and is up 350 per cent in the past year. In Canada, Score Media (SCR on TSX) is already a key player, and Canada is working on legislation to legalize single-game betting. SCR stock is up 103 per cent in the past year. We also like Flutter Entertainment (FLTR in London), which took over Canada’s Stars Group last year. Its stock is up 69 per cent in a year, and hit an all-time high on Thursday.

‘Reopening’ stocks

My sons bought some Dave & Busters stock (PLAY on Nasdaq) this year. I took them to one of the company’s restaurants in 2019, and they remember it well. It is a higher-risk play, as the company has a lot of debt, but in a reopened world we bet customers flock back to their restaurants looking for fun after a year of pandemic boredom. While still down 24 per cent over a one-year term, PLAY stock has doubled since October. Other re-opening stocks we like are Air Canada (AC on TSX) and Wynn Resorts (WYNN on Nasdaq). For those that can’t decide between airlines, hotels, car rentals, or cruises, a recovery stock to play travel in general is Booking Holdings (BKNG on Nasdaq), which has doubled since the pandemic lows, but still only up 8 per cent over a one-year period.

Banks/financials

Shares of Sun Life (SLF on TSX) shot up five per cent on Wednesday, beating their entire one-year return in a single trading day. What happened? Well 10-year rates went to — gasp — one per cent. Insurance companies’ earnings improve when rates rise, and with lots of talk of resumed economic growth, rates are bound to rise, one day. In addition, the financial sector has lagged the general market for some time now. Everyone hated banks last year. This year, maybe not. We like Bank of Nova Scotia (BNS on TSX), JP Morgan (JPM on NYSE) and Morgan Stanley (MS on NYSE), in addition to Sun Life.

Commodities

Remember commodities? They are off to a huge start this year already with investors flooding back into the sector, which has been largely ignored for a few years. First Quantum Minerals, a copper company (FM on TSX) rose 12 per cent in the first three trading days of 2021. US Steel (X on NYSE) rose 27 per cent and is up 98 per cent on a 52-week basis. We have heard anecdotal stories of steel shortages, and long delivery times. The materials sector is being helped by a weak U.S. dollar, but also from growth returning to China. In addition, of course, in the pandemic, there were not a lot of new mines or steel mills that started up! Lundin (LUN on TSX) still looks good, and we would not forget about agricultural stocks, with Nutrien (NTR on TSX) up seven per cent this year and looking better than it has in ages.

Take care,

Please note that this article was originally published in the Financial Post on Jan 08, 2021.

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