The COVID-19 pandemic caused by the novel coronavirus has wreaked havoc on the stock market, not to mention disrupted the lives of millions of Americans. However, if you're fortunate enough to have some cash sitting on the sidelines, it could also be a smart time to put it to work in the stock market.
With that in mind, here's why I think investors with $5,000 or so to put to work in the stock market should take a closer look at Berkshire Hathaway (BRK.A -0.59%) (BRK.B -0.29%), Financial Select Sector SPDR ETF (XLF 0.72%), and Digital Realty Trust (DLR 0.02%).
If I could buy only one stock
I've written before that if I were only allowed to buy one stock, Berkshire Hathaway would be it. The conglomerate owns a portfolio of over 60 subsidiary businesses, including household names such as GEICO, Duracell, Dairy Queen, and many more. And that's not to mention the massive stock portfolio worth more than $200 billion, which has stakes in about four dozen companies. Buying Berkshire is like buying more than 100 high-quality investments in a single stock, most of which Warren Buffett himself hand-picked.
Many investors are a bit frustrated with Berkshire's management right now, and to be fair, I can't blame them. Berkshire is sitting on a huge stockpile of cash and barely invested any of its money during the March crash. In fact, with $137 billion of cash and equivalents on its balance sheet, its cash hoard has never been higher.
Even so, Berkshire trades for just 1.15 times book value, a multiple that has only been seen briefly in the company's recent history. In fact, Buffett has even said before that with the stock at 1.2 times book, he would consider it significantly cheaper than its intrinsic value. I'm inclined to agree -- Berkshire is one of my largest stock positions, and if the current low valuation persists, it could end up getting even larger.
All of the big banks look cheap, so why not buy them all?
The financial sector has been one of the worst performing parts of the stock market in this year's downturn. As of this writing, the S&P 500 is only about 14% lower than its all-time closing high set in February, but the Financial Select Sector ETF is down by 29% for the same period.
To be sure, there are some good reasons for the poor performance. First off, with interest rates at record low levels, it's a bad environment for banks to earn a profit, even if there weren't a global pandemic going on. And more importantly, the spiking unemployment and recession could lead to a surge in loan defaults, especially if the economic shutdowns across the United States persist for longer than expected.
Having said that, there's tremendous value to be found in banks for patient, long-term investors. All of the big U.S. banks are well capitalized, and asset quality has improved dramatically over the past decade or so. Most have set aside billions to cover expected loan losses and should easily be able to weather the storm.
Most U.S. bank stocks are trading for valuations not seen in years. Bank of America (NYSE: BAC) trades for 16% less than its book value, and Wells Fargo (NYSE: WFC) trades for an even steeper 35% discount. Even ultra-high-quality U.S. Bancorp (NYSE: USB) is trading at a valuation not seen since the depths of the financial crisis.
So, instead of investing in just one bank, it could be a smart idea to just buy them all. And the Financial Select Sector SPDR ETF is a great way to do it.
A different kind of tech stock
Digital Realty Trust is a real estate investment trust that owns and operates a portfolio of nearly 270 data centers around the world. If you aren't familiar, a data center is a building that houses servers and networking infrastructure in a safe and reliable environment. Think of data centers as the "home" of the internet. When you store a document in the cloud or access cloud-based software, that information has to physically live somewhere. That's where data centers come in.
In a nutshell, the need for secure data storage and transmission has exploded in recent years, and this trend is likely to accelerate going forward. The wide-scale rollout of 5G technology will take years to play out and will dramatically increase the amount of data being transmitted around the world. And more devices continue to be connected to the internet as time goes on – for example, data-heavy virtual and augmented reality devices are a $30 billion market today. In just three years, it's expected to be more than nine times this size.
If anything, the COVID-19 pandemic could be a tailwind for Digital Realty. More people than ever are working from home, streaming video, and otherwise spending time on their connected devices. Digital Realty is an income-generating tech stock that should have tons of growth opportunities in the years ahead, and could be a great choice for long-term investors.
Buy for the long term
As a final thought, it's important to emphasize that while I think all three of these will be fantastic long-term investments, I am under no delusions that the path higher will be a straight one. As long as the COVID-19 pandemic is going on, it's reasonable to expect an elevated level of volatility. In other words, don't buy these three stocks because you want them to go up this month, or even this year. Buy them because they're compelling investment opportunities that should do well over the next several years and beyond.