American stocks had an excellent year in 2020. After initially dropping in the first quarter, stocks rallied strongly for the remainder of the year. The S&P 500 index is on track to rally by more than 10% this year. It has increased by more than 60% from its year-to-date low of $2,220.
This rally was driven by technology companies. Indeed, some of the best performers in the S&P 500 index were tech companies like Etsy, Advanced Micro Devices, PayPal, and ServiceNow.
In this article, we will look at some of the worst-performing stocks in 2020 and review their outlook for 2021. That’s because, in the past, some worst-performers in a given year have turned out to be the best stocks in the following year. For example, in 2019, L Brands was among the worst-performing stocks in the S&P. In 2020, it turned out to be the best performer.
Carnival Corp (CCL)
The cruising industry was one of the most-affected sectors globally. That’s because cruise ships were identified as being some of the riskiest places for spreading the virus. Indeed, one of Carnival’s ships was one of the earliest spreaders of the disease. As a result, all cruise ship companies had to park their expensive ships for a large part of the year.
The situation was made worse by the fact that cruise ship companies are not incorporated in the United States for tax purposes. As such, unlike airlines, they were not considered important enough for a bailout.
Therefore, Carnival, Norwegian, and Royal Caribbean were the worst-performing stocks in the S&P 500. Their shares dropped by 57%, 56%, and 44%, respectively.
To survive, Carnival had to go to the debt market, where it borrowed billions of dollars. Today, the firm has more than $28 billion in total debt and about $8 billion in cash. Its debt to equity ratio has also risen to more than 135%.
So, will Carnival shares rebound in 2021? We believe so. That’s because the COVID-19 vaccine will partially eliminate the COVID risk. Also, since most people stayed at home in 2020, there is a possibility that the industry will see a major recovery in 2021. The same is true for other cruise ship companies.
Carnival shares vs. S&P 500
Occidental Petroleum (OXY)
In 2019, Occidental was flying high, supported by the relatively high crude oil prices. During that year, the company completed the acquisition of Anadarko Petroleum for about $55 billion. To fund this acquisition, the firm borrowed heavily, including from Warren Buffett.
In 2020, the situation changed, and OXY became the third-worst performing stock in the S&P 500. It dropped by more than 54%, bringing its market cap to just $17 billion.
This underperformance was mostly because of the overall low oil prices as demand for oil declined. At some point, the overall price of oil turned negative, hurting companies with upstream operations like Occidental.
It was also because of the company’s indebtedness. While the company has just $1.9 billion in cash, it has more than $41 billion in total debt. Indeed, this debt is bigger than its market cap of $17 billion, making the firm almost insolvent.
Therefore, in 2021, for the stock to do well, several things will need to happen. First, the Federal Reserve will need to maintain interest rates low, which will lower the company’s interest payments.
Second, it will need the price of crude oil to jump. So far, the prices are aiming at $60, but with American producers increasing their production, there is a possibility that the price will retreat. Therefore, for investors, it is worth avoiding this company.
OXY vs. S&P 500
HollyFrontier Corporation (HFC)
As mentioned above, a key theme in 2020 was low crude oil prices. That affected shale producers like Occidental and refiners. Furthermore, the refiners had little demand as more people stayed at home and as aircrafts remained parked.
One of the worst-affected refiners was HollyFrontier, a company that produces lubricants, light products, and heavy products like asphalt. It has operations in Eldorado, Navajo, Tulsa, and Sonneborn LLC.
The company’s shares dropped by more than 50% in 2020, bringing its market cap to just $4.13 billion. In the most recent quarter, the firm’s loss increased to more than $423 million. It processes between 340,000 and 370,000 barrels of oil per day. At the same time, its debt increased to more than $3.6 billion while its cash dropped to more than $1.5 billion.
In 2021, the company’s shares will perform based on two key things. First, it will need oil prices to recover from the current price. For that to happen, demand will need to bounce back substantially. Second, it will react to Joe Biden’s policies on climate change and energy stocks. Therefore, HFC’s stock could gain a bit from the current levels in 2021.
HollyFrontier vs. S&P 500
Wells Fargo (WFC)
Banks were among the worst-performing stocks in 2020 as the Fed brought interest rates to zero. Also, all banks allocated billions of dollars to provisions of bad debt. Indeed, the SPDR Bank ETF (KBE) declined by more than 12% in 2012.
Wells Fargo was the worst-performing big bank as its stock dropped by more than 45%. That happened because of the asset cap limit forced on the company by the Federal Reserve. It was also forced to reduce its dividend in 2020 after it failed the stress test. The decision by Warren Buffett to slash his holding also irked many investors.
So, will Wells Fargo bounce back in 2021? It is possible, but the bank faces several key challenges. For example, interest rates will possibly not rise in 2021, as the Fed has warned. Second, the company could come into the spotlight by the new Biden administration. Therefore, we recommend staying away from this bank and instead allocating funds with other firms like Goldman Sachs, UBS, and Morgan Stanley.
Wells Fargo vs. S&P 500
Vornado Realty Trust (VNO)
Vornado Realty Trust is a large Real Estate Trust (REIT) that owns some of the best-known office, retail, residential, and signage properties in the United States. The company, which yields about 6%, had one of its worst-years as more people stayed at home. As such, many tenants failed to pay their rent, which affected Vornado’s income.
VNO share price dropped by more than 43%, making it the worst-performing S&P 500 REIT company. It also increased its debt to more than $8 billion, which is higher than the total market cap.
Therefore, there is a possibility that VNO share price will bounce back in 2020 because of the virus. For shopping, we believe that people will go back to the malls again. Similarly, more companies will start taking their employees back to the office. As such, it makes sense to invest in VNO in 2021.
VNO vs. S&P 500
2020 was a bad year for these five companies. Others that had bad years were firms like United Airlines, American Airlines, Simon Property Group, Phillips 66, and ExxonMobil. While some of these firms may bounce back in 2021, not all of them will. Therefore, you should be careful about the ones you select.