We’re now in an economic environment that takes much of the wind out of most growth stocks’ sails.
The past several years have been tremendous ones for growth stocks. Value stocks? Not so much. Low interest rates and a booming economy obviously aren’t a problem for most of the companies considered value names. It’s just that this sort of economic scenario is ideal for growth companies…cheap capital, and plenty of demand.
The tables may be turning. That is to say, high borrowing costs and a slower economy favor the cash-cow companies you’ll frequently find represented by value stocks. And it’s a dynamic that could last for years.
With that as the backdrop, here’s a rundown of three value stocks that could easily outperform most others between now and 2030.
Hercules Capital
Hercules Capital (HTGC 1.02%) isn’t a typical for-profit corporation. Rather, it’s a business development company (or BDC), meaning it provides capital to up-and-coming outfits that need cash to capitalize on an opportunity. This cash can be provided in exchange for an equity stake in the organization borrowing it. For Hercules Capital, though, these funds are usually offered in the form of a loan. Given the above-average risk of these loans, they’re usually made at above-average interest rates. That’s how Hercules can afford its trailing-12-month dividend payout of $1.92 per share — it’s just passing along a piece of the interest income it’s collecting on all the capital it’s loaned out.
To describe Hercules as a mere lender, however, still doesn’t do it justice. It’s a specialist, focused on the areas of life sciences (biopharma), technology, renewable energy, and software companies that offer subscription-based access to their software. By limiting its portfolio of borrowers to a narrow range of business lines, it’s better equipped to serve them by also offering its own expertise.
Investors keeping their fingers on the pulse of the business development company arena probably already know that a few too many of them have been unreliable of late. The quick, steep growth in interest rates has put bearish pressure on many of their shares, since that’s how the market changes their dividend yields to prevailing, risk-adjusted levels. Higher interest rates also mean business development companies’ own cost of capital is up, while the wobbly economy is creating measurable increases in loan defaults.
On balance, though, the environment may me more beneficial than problematic for BDCs. More and more conventional lenders are less and less interested in making such speculative loans to small and mid-sized companies. This is steering would-be borrowers to BDC players like Hercules Capital, which are showing a surprising degree of resilience anyway. That’s a big reason Hercules Capital shares have performed so well in recent years while other, similar stocks haven’t. Hercules Capital shares recently hit a record high, in fact.
No, it’s not a value stock in the traditional sense of the term. Yet it trades and performs like one, offering newcomers a chance to plug in while the dividend yield stands at 10%, and while shares are priced at less than 10 times their past and projected earnings.
Albemarle
You may be more familiar with Albemarle (ALB -0.96%) than you realize. The chemical company is in the lithium business, which is used in the batteries found in most electric vehicles. It also supplies bromine (another kind of salt) used in more industrial applications like fire safety solutions and mercury remediation. Then there’s its chemical catalyst business Ketjen.
An exciting business? Nope. Not even a little bit. But a company doesn’t have to be exciting to be rewarding for investors. It just needs to be capable of generating revenue that can be consistently converted into net income.
Anyone who’s kept a close eye on Albemarle since 2021 likely knows it’s been a bit inconsistent lately. Sales as well as profits soared between the latter half of 2022 and the early half of 2023, but the boon didn’t last. Its top and bottom lines are both shrinking rather dramatically.
ALB Revenue (Quarterly) data by YCharts
This is one of those cases, however, where it pays to take a step back and understand what’s happening.
This large swell and subsequent contraction? It’s entirely the result of a huge rise and fall in the price of lithium. As you might recall, EV-driven demand was soaring, while at the same time the supply chain’s disruption resulting from the COVID-19 pandemic was finally being fully realized. Lithium supplies did finally catch up with demand, leading to easing prices that dragged Albemarle’s sales and earnings lower with them.
Except, the sellers may have overshot their target. Albemarle stock is now valued at a modest 18 times next year’s projected per-share profits. That’s not dirt cheap. But, in light of Morningstar analyst Seth Goldstein’s prediction that lithium prices will be 70% higher than they are now by 2030, there’s every reason to believe Albemarle’s bottom line will continue growing beyond next year. Bolstering this bullish argument is consulting firm McKinsey’s expectation that demand for lithium — regardless of its price — is set to grow at an annualized pace of more than 30% through 2030.
Berkshire Hathaway
Last but not least, add Berkshire Hathaway (BRK.A 1.57%) (BRK.B 1.42%) to your list of value stocks that could outperform most others over the course of the coming five years. Berkshire shares should trade and perform like a value stock at a time when value stocks are finding favor from investors.
Berkshire Hathaway is of course Warren Buffett’s proverbial brainchild. It was launched back 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 holds stakes in a few dozen publicly traded outfits including Apple, Bank of America, and Coca-Cola. Most all of these stocks are considered value stocks, too, thus making Berkshire Hathaway the value play Buffett intends it to be.
These holdings aren’t even half the story, however. Nearly two-thirds of Berkshire’s value is actually derived by the wholly owned private (not publicly traded) companies held by the conglomerate. Pilot Travel Centers, Dairy Queen, flooring company Shaw Industries, Duracell batteries, and Geico Insurance are just a sampling of the several dozen privately owned businesses in Berkshire Hathaway’s portfolio. These are great cash-generating brands, providing the lion’s share of the $37.4 billion worth of operating income Berkshire reported for 2023, up 21% from 2022’s bottom line.
What’s Buffett doing with this cash? Nothing, really. In fact, he’s done so little with this operating income of late that Berkshire’s now sitting on a record-breaking cash hoard of $189 billion. He simply can’t find any opportunity he likes at a price he likes.
This doesn’t change the fact that Berkshire Hathaway remains one of the market’s best and most reliable options for investors looking for more exposure to value stocks. You’re entrusting your investment to one of the most proven (if not the most proven) value investors of all time. It could truly shine in an economic environment that’s ideally suited for value names.