2020 has been a weird year for investing in stocks. Just one month after COVID-19 struck, the S&P 500 had dropped 27% from its pre-pandemic peak. And yet, barring disaster, it's now looking like the S&P might actually finish 2020 up 14% from where it began.
Despite new reported cases of the coronavirus skyrocketing, and far worse infection numbers than what we saw in March, we could well end up with a better-than-average annual stock market performance in this anything but average year. But given how upside-down everything in 2020 worked out, how should an investor prepare to invest in 2021?
My advice: Invest in businesses and not in just stock tickers. And to that end, here are three huge businesses that I think should do well as coronavirus vaccines begin to roll out in June and July of next year, and life starts getting back to normal.
Alphabet, king of advertising
With shoppers confined to their homes early in the year, many stores going bankrupt as a result, and prospects uncertain even for businesses that stayed up and running, 2020 was not a great year for advertising. (Why spend money telling people where to shop, if they're not shopping at all?)
Media agency GroupM estimates that total advertising spending in 2020 is going to end up dropping 9% from 2019 levels. And yet, digital advertising, in which Alphabet ( GOOG 0.16% ) ( GOOGL 0.05% ) holds the leading market share, probably increased 5% (at the expense of TV, print, radio, and outdoor advertising) as consumers spent more time online.
If the pandemic nears its end in July 2021, the advertising market as a whole should revive shortly thereafter, as consumers resume traveling, eating out, and visiting live entertainment. Even so, GroupM believes that digital advertising will continue to outperform all other forms of advertisement, garnering about 55% of ad dollars spent -- and GroupM isn't alone in thinking this. In a recent report on CNBC, Morgan Stanley analysts were quoted predicting a 20% increase in online advertising in 2021 (three times the growth GroupM predicts for TV advertising).
Even with Alphabet stock already up 35% year to date, this bodes well for the company. In a depressed ad environment, revenue in the most recent quarter grew only 14%. If Alphabet can grow that to 20% in 2021 -- or better -- it stands to reason that the stock price will follow the business performance higher.
Have a Coke and a smile
Coca-Cola ( KO -0.58% ) is a second likely big beneficiary of the pandemic's end in 2021. The nation's leading soft drink maker took a big hit from the coronavirus, and in particular, from stay-at-home orders and closures of restaurants and other "away from home" venues for consuming food and drink.
As Q1 2020 wrapped up and Q2 began, Coca-Cola CEO James Quincey broke the bad news to investors: As a direct result of the pandemic, Coke was experiencing a "sharp decline" in away-from-home sales of its drink products, which make up about half of Coke's annual revenue stream.
Now, the good news is that this crisis has abated somewhat. After suffering a steep 28.5% falloff in sales in Q2, Coke's sales were down only 9% year over year in Q3, according to data from S&P Global Market Intelligence. The better news is that analysts forecast Coke will cut that sales decline in half in Q4 (barring a second wave of coronavirus shutdowns). And the best news is that by 2021, analysts believe that the abatement of the pandemic and the reopening of bars, restaurants, and entertainment venues will allow Coca-Cola to resume growing again, with sales up perhaps as much as 10% by year-end.
If they're right about that, the $36.4 billion in sales Coke could do next year would almost return it to 2019 levels. With Coke's share price currently trading 4% below where it did at the start of this year, there's still time to buy before the business recovers.
Berkshire Hathaway -- just in case
But what if businesses don't recover? What if, in the worst possible scenario, the vaccine rollout hits a hiccup in 2021 -- or what if the vaccines prove only temporarily effective, such that, even after vaccinating, infections can still recur?
Well, I suspect that would slow down the economic recovery considerably. So as a hedge against that possibility, my third mega-cap stock pick for 2021 would be a "flight to safety" play: Berkshire Hathaway ( BRK.A -0.15% ) ( BRK.B -0.31% ).
Why buy Berkshire? For one thing, because it's cheap. Up just less than 1% since the year began, Berkshire Hathaway hasn't appreciated nearly as much as some of the hotter "tech stocks." But by the same token, Berkshire Hathaway shares aren't as overpriced as some of these tech stocks. In fact, priced at just 1.3 times book value today, Berkshire shares are very close to the price at which Warren Buffett says he would buy back Berkshire stock.
One of the top 10 biggest stocks in America today, Berkshire owns a cross-section of some of the nation's biggest and best brands -- everything from Geico insurance, to Duracell batteries, to Fruit of the Loom underwear and Dairy Queen restaurants. It's sort of like a higher-quality version of the S&P 500 -- and gives you a way to invest in just America's best businesses, handpicked by Warren Buffett himself, while not having to buy 250 below-average businesses in a basket of 500.
If the coronavirus doesn't go away as hoped next year and drags on longer than expected, I think owning just the best and most profitable companies in the country is a fine way to hedge against recession risk.