The last few years have been great for growth stocks. Value stocks? Not really. Low interest rates and a booming economy are obviously not a problem for most companies considered value stocks. It’s just that this type of economic scenario is ideal for growing businesses…cheap capital and abundant demand.
The roles may be changing. Simply put, high borrowing costs and a slower economy favor cash cow companies that are frequently found represented by value stocks. And it’s a dynamic that could last for years.
With this backdrop, here’s a look at three value stocks that could easily outperform most others by 2030.
Capital Hercules
Capital Hercules (NYSE:HTGC) is not a typical for-profit company. It is rather a business development company (or BDC), meaning it provides capital to emerging businesses that need liquidity to capitalize on an opportunity. This money can be provided in exchange for an equity stake in the organization borrowing it. For Hercules Capital, however, these funds are usually offered as a loan. Given the above-average risk of these loans, they are generally provided at above-average interest rates. This is how Hercules can afford to pay a dividend of $1.92 per share over the trailing 12 months – it’s just passing on a portion of the interest income it receives on all the loaned capital.
However, describing Hercules as just a lender still doesn’t do him justice. It is a specialist focused on the fields of life sciences (biopharma), technology, renewable energies and software publishers who offer access to their software by subscription. By limiting its portfolio of borrowers to a narrow range of industries, it is better equipped to serve them by also offering its own expertise.
Investors who keep an eye on the business development company industry probably already know that many of them have been unreliable of late. Rapid and strong interest rate growth has put downward pressure on many of their stocks, because that is how the market changes their dividend yields to prevailing risk-adjusted levels. Higher interest rates also mean an increase in the cost of capital for business development companies, while the faltering economy creates a measurable increase in loan defaults.
Overall, however, the environment may be more beneficial than problematic for BDCs. More and more conventional lenders less and less interested by granting such speculative loans to small and medium-sized businesses. This directs potential borrowers to BDC players like Hercules Capital, who demonstrate a surprising degree of resilience anyway. This is one of the main reasons why Hercules Capital stock has performed so well in recent years, unlike other similar stocks. In fact, Hercules Capital shares recently hit an all-time high.
No, it’s not a stock in the traditional sense. Yet it trades and behaves like one, offering newcomers a chance to connect while the dividend yield stands at 10% and shares are valued at less than 10 times their past and projected earnings.
Albemarle
You may know better Albemarle (NYSE:ALB) than you think. The chemical company is active in the lithium sector, which is used in the batteries of most electric vehicles. It also supplies bromine (another type of salt) used in more industrial applications such as fire safety solutions and mercury removal. Then there is its chemical catalysts business, Ketjen.
An exciting job? No. Not even a little. But a business doesn’t have to be exciting to be rewarding for investors. It simply must be able to generate revenue that can be consistently converted into net income.
Anyone who has been watching Albemarle closely since 2021 probably knows that it has been a bit inconsistent as of late. Sales as well as profits soared between the second half of 2022 and early 2023, but this boon did not last. His top and bottom results both decline quite dramatically.
This is, however, one of those cases where it’s worth taking a step back and understanding what’s going on.
This big swell and this contraction that follows? This is entirely the result of a huge rise and fall in the price of lithium. As you may recall, demand for electric vehicles was skyrocketing, while at the same time the supply chain disruption resulting from the COVID-19 pandemic was finally fully realized. Lithium supplies eventually caught up with demand, leading to a drop in prices that led to a decline in Albemarle’s sales and profits.
Except that the sellers may have exceeded their objective. Albemarle’s stock is now valued at a modest 18 times next year’s projected earnings per share. It’s not very cheap. But, in light of The morning star Based on analyst Seth Goldstein’s prediction that lithium prices will be 70% higher than they are currently by 2030, there is every reason to believe that Albemarle’s bottom line will continue to grow at – beyond next year. This bullish argument is reinforced by forecasts from consulting firm McKinsey that demand for lithium, regardless of its price, is expected to grow at an annualized rate of more than 30% through 2030.
Berkshire Hathaway
Last but not least, add Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) to your list of value stocks that could outperform most others over the next five years. Berkshire shares are expected to trade and perform like value stocks at a time when value stocks are finding favor with investors.
Berkshire Hathaway is of course Warren Buffett’s proverbial brainchild. It was launched in 1965, when the textile company of the same name acquired an insurance business. Buffett simply never stopped adding these outside entities to the mix. Today, Berkshire has stakes in a few dozen publicly traded companies, including Apple, Bank of AmericaAnd Coca-Cola. Most of these stocks are also considered value stocks, making Berkshire Hathaway the value play Buffett intends it to be.
However, these holdings aren’t even half the story. Nearly two-thirds of Berkshire’s value actually comes from wholly private (non-publicly traded) companies owned by the conglomerate. Pilot Travel Centers, Dairy Queen, flooring company Shaw Industries, Duracell batteries and Geico Insurance are just a few examples of the several dozen private companies in Berkshire Hathaway’s portfolio. These are excellent cash-generating brands, providing the lion’s share of Berkshire’s reported $37.4 billion in operating profits for 2023, up 21% from 2022 net income.
What does Buffett do with this money? Nothing, really. In fact, it’s done so little with that operating profit lately that Berkshire now has a record $189 billion in cash. He just can’t find an opportunity he likes at a price he likes.
That doesn’t change the fact that Berkshire Hathaway remains one of the best and most reliable options on the market for investors looking for greater exposure to value stocks. You entrust your investment to one of the most proven (if not THE most proven) value investors of all time. It could really shine in an economic environment perfectly suited to valuable companies.
Should you invest $1,000 in Berkshire Hathaway right now?
Before buying Berkshire Hathaway stock, consider this:
THE Motley Fool Stock Advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now…and Berkshire Hathaway wasn’t one of them. The 10 selected stocks could produce monster returns in the years to come.
Consider when Nvidia made this list on April 15, 2005…if you had invested $1,000 at the time of our recommendation, you would have $671,728!*
Equity Advisor provides investors with an easy-to-follow plan for success, including portfolio building advice, regular analyst updates, and two new stock picks each month. THE Equity Advisor the service has more than quadrupled the return of the S&P 500 since 2002*.
*Stock Advisor returns May 28, 2024
Bank of America is an advertising partner of The Ascent, a Motley Fool company. James Brumley has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Apple, Bank of America and Berkshire Hathaway. The Motley Fool has a disclosure policy.
Prediction: These stocks could be the best performers until 2030 was originally published by The Motley Fool
