The past few years have been great for growth stocks. Value of shares? Not so much. Low interest rates and a booming economy are obviously not a problem for most companies that are considered value names. It’s just that this type of economic scenario is ideal for growth companies…cheap capital and high demand.
The tables can turn. That is, high borrowing costs and a slower economy favor the cash cow companies often found in value stocks. And it’s a dynamic that can last for years.
With that as background, here’s a look at three value stocks that could easily outperform most others between now and 2030.
Hercules capital
Hercules capital (NYSE:HTGC) is not a typical for-profit company. Rather, it is a business development company (or BDC), meaning it provides capital to emerging companies that need money to take advantage of an opportunity. This money can be provided in exchange for an equity stake in the organization that borrows it. However, at Hercules Capital these funds are usually offered in the form of a loan. Given the above-average risk of these loans, they are usually provided at an above-average interest rate. That’s how Hercules can pay its dividend payment of $1.92 per share over the next twelve months. It passes on only a portion of the interest income it receives on all the capital it has lent.
However, it still doesn’t do justice to describe Hercules as just a moneylender. It is a specialist focused on the fields of life sciences (biopharma), technology, sustainable energy and software companies that offer access to their software on a subscription basis. By limiting its portfolio of borrowers to a limited number of business units, the company is better equipped to serve them by also offering its own expertise.
Investors with their finger on the pulse of the business development company arena probably already know that a few too many of them have been unreliable lately. The rapid, steep growth in interest rates has put bearish pressure on many of their stocks as it moves the market to move their dividend yields toward prevailing risk-adjusted levels. Higher interest rates also mean that business development companies’ own costs of capital are rising, while the shaky economy is causing measurable increases in loan defaults.
On balance, however, the environment may be more beneficial than problematic for BDCs. More and more conventional lenders are becoming less interested in providing such speculative loans to small and medium-sized businesses. This leads potential borrowers to BDC players like Hercules Capital, which are showing a surprising degree of resilience anyway. That’s a big reason why Hercules Capital stock has performed so well in recent years, while other similar stocks have not. Shares of Hercules Capital recently even reached an all-time high.
No, it is not a value stock in the traditional sense of the word. Still, it trades and performs as such, offering newcomers a chance to get in, while the dividend yield is 10% and share prices are less than 10 times their past and expected earnings.
Albemarle
You may be more familiar with it Albemarle (NYSE: ALB) than you realize. The chemical company operates in the lithium sector, which is used in the batteries found in most electric vehicles. It also provides bromine (another type of salt) used in more industrial applications such as fire safety solutions and mercury remediation. Then there is the chemical catalyst company Ketjen.
An exciting company? No. Not even a little bit. But a company doesn’t have to be exciting to be rewarding for investors. It just needs to be able to generate revenue that can consistently be converted into net income.
Anyone who has been keeping a close eye on Albemarle since 2021 probably knows that it has been a bit inconsistent lately. Both sales and profits soared between the second half of 2022 and the early half of 2023, but the boon didn’t last. The top and bottom lines both shrink quite dramatically.
However, this is one of those cases where it pays to take a step back and understand what’s happening.
This big swell and subsequent contraction? It is entirely the result of a huge rise and fall in the price of lithium. As you may recall, demand for electric vehicles soared at the same time that the supply chain disruption caused by the COVID-19 pandemic was finally fully realized. Lithium supplies finally caught up with demand, leading to price cuts that reduced Albemarle’s sales and profits.
However, the sellers may have exceeded their target. Albemarle shares are now valued at a modest 18 times next year’s expected earnings per share. That’s not dirt cheap. But in light of Morning star According to analyst Seth Goldstein’s prediction that lithium prices will be 70% higher in 2030 than they are today, there is every reason to believe that Albemarle’s profits will continue to grow beyond next year. This bullish argument is reinforced by consultancy McKinsey’s expectation that demand for lithium – regardless of its price – will grow by more than 30% annually 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 stock should trade and perform like value stocks at a time when value stocks are favored by investors.
Berkshire Hathaway is, of course, the proverbial brainchild of Warren Buffett. It was launched in 1965 when the textile company of the same name acquired an insurance company. Buffett simply never stopped adding these outside entities to the mix. Today, Berkshire has stakes in several dozen publicly traded companies, including Apple, bank of AmericaAnd Coca-Cola. Nearly all of these stocks are also considered value stocks, making Berkshire Hathaway the value play that Buffett envisions.
However, these holdings are not even half of the story. Nearly two-thirds of Berkshire’s value actually comes from the private (unlisted) companies that are wholly owned by the conglomerate. Pilot Travel Centers, Dairy Queen, flooring company Shaw Industries, Duracell batteries and Geico Insurance are just a few of the dozens of private companies in Berkshire Hathaway’s portfolio. These are great cash-generating brands that account for the lion’s share of the $37.4 billion in operating revenues Berkshire reported for 2023, up 21% from 2022 operating results.
What does Buffett do with this money? Actually nothing. In fact, he’s done so little with this bottom line lately that Berkshire is now sitting on a record-breaking cash pile of $189 billion. He simply can’t find any option he likes, at a price he likes.
This doesn’t change the fact that Berkshire Hathaway remains one of the best and most reliable options on the market for investors looking for more exposure to value stocks. You are entrusting 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 that’s ideally suited to value names.
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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 in and recommends Apple, Bank of America and Berkshire Hathaway. The Motley Fool has a disclosure policy.
Prediction: These Could Be the Best Performing Value Stocks Through 2030 Originally published by The Motley Fool
