Stock prices are starting to feel a bit frothy. For perspective, the S&P 500 is currently valued at more than 23 times its trailing earnings, and more than 21 times this year’s expected profits. That’s a steep valuation by nearly any standard. It’s especially steep, however, in an environment where interest rates are high. See, higher borrowing costs make growth more expensive to fund, which works against growth companies and their stocks.
What works against growth stocks often works in favor of value stocks though. And there are still plenty of reasonably priced value stocks to consider stepping into. Here’s a closer look at three of the best value stocks to buy now and hold for years on end, given that interest rates are apt to remain near their current levels for the indefinite future.
Occidental Petroleum
If you think the world’s use of oil is near its end now that consumers have access to environmentally friendlier alternatives, think again. The U.S. Energy Information Agency suggests renewable energy only accounts for about 12% of total domestic power production. The country’s single-biggest source of energy remains petroleum, at 36%, while natural gas — often extracted along with petroleum — accounts for 32% the United States’ energy usage. These numbers are in line with the rest of the world’s.
But change is underway. It’s just taking shape incredibly slowly at the same time the worldwide need for power continues to swell. Standard & Poor’s believes that even as far down the road as 2050 the world’s top source of energy will still be oil, with renewables only being a close second. Natural gas will still be a respectable third.
Enter Occidental Petroleum (NYSE: OXY).
While the rest of the energy industry is focused on crude’s eventual wind-down, Occidental CEO Vicki Hollub is making a point of establishing new sources now for 2025. That’s when — as she put it when speaking at this year’s World Economic Forum — the “world is going to be short of oil” to a degree that will keep oil prices in the ballpark of $80 to $85 per barrel for a long, long while. The impending acquisition of CrownRock is one such way the company is securing a bigger supply of oil and gas for the future, for instance.
That being said, Occidental isn’t blind to the foreseeable future. It’s addressing the dirty side of the oil business as well. As an example, it’s developing technologies that (literally) suck carbon dioxide out of the air before it can adversely impact the environment. It’s even using this captured carbon dioxide as a means of improving the amount of oil a well ultimately produces.
You can step into Occidental stock at less than 20 times this year’s projected per-share profits, but more than that, the stock’s priced at only 14.4 times next year’s expected earnings of $4.43 per share.
Bank of America
It’s not exactly the best time to be in the banking business. Not only is demand for banking services being crimped by the lethargic economy, consumers and corporations alike are starting to fall behind on their loan payments. The subsequent write-offs are taking a measurable toll on banks’ bottom lines. That’s a big reason bank stocks have been subpar performers of late.
Take a step back and look at the bigger picture though. Banking is a business the world will never not need. And nothing is happening to banks now that they haven’t experienced — and survived — before. Indeed, like previous cyclical headwinds, this one’s arguably a long-term buying opportunity. As Warren Buffett puts it, “be fearful when others are greedy and to be greedy only when others are fearful.”
And if you’re ready to be greedy with a bank stock many others are fearful to own at this time, why not start with one that Buffett loves? That’s Bank of America (NYSE: BAC), which is currently Berkshire Hathaway‘s second-biggest stock holding.
It’s far from perfect or impervious to industrywide challenges. Last quarter’s revenue was down year over year, while loan charge-offs and write-downs were up.
On balance though, BofA’s holding up rather well. Performance metrics such as its efficiency ratio and returns on shareholder equity are steady with year-ago levels, while its capital structure’s health measures like common equity levels continue to inch higher. Much of this resilience just reflects the bank’s sheer size and its subsequent ability to push through any challenge; Bank of America is the country’s second-biggest bank, as measured by assets.
Newcomers will be buying into BofA shares at a price-to-earnings ratio of less than 12. Perhaps the more compelling reason to jump into that value name right now, however, is its current dividend yield of nearly 2.7%.
Intel
Finally, add Intel (NASDAQ: INTC) to your list of value stocks to buy and hold for years.
Technology stocks typically don’t qualify as value stocks. And for years, this one wouldn’t have. Due to a combination of time, size, and a streak of disappointing developmental missteps, though, Intel shares have underperformed their way to a value status. While the stock’s immediate forward-looking price-to-earnings ratio of 31 is a bit frothy, the more normalized per-share earnings of $2.24 projected for next year translates into a P/E of less than 20. That’s oddly low for a tech name of this ilk. Perhaps more importantly, this brewing profit improvement finally reflects Intel’s long-pent-up potential.
Intel is still the leading name in computer processors, for the record. But, names like Nvidia and Advanced Micro Devices have significantly turned up the competitive pressure on the corporate as well as the consumer fronts. Intel wasn’t quite ready for the rapid rise of these rivals. Underscoring this challenge is Intel’s storied struggle to begin mass producing 7 nanometer chips… a stumble many investors haven’t seemed willing to forget.
The past few months arguably marked a turning point for Intel, however. Not only did it introduce its first processors with built-in AI acceleration tech late last year, but just last month the company announced a deal with Microsoft to manufacture a custom-designed chip for the software giant. This is the first major (publicized, anyway) customer for the chipmaker’s nascent contract-manufacturing business.
Although it could take years before Intel’s foundry business is a serious threat to third-party manufacturing powerhouse Taiwan Semiconductor, this is an incredible opportunity materializing at the same time Intel’s own branded chips are finally spurring buyer interest again. The market doesn’t appear to be pricing this quiet tailwind in yet.
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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 has positions in and recommends Advanced Micro Devices, Bank of America, Berkshire Hathaway, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and Occidental Petroleum and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
Got $5,000? Buy and Hold These 3 Value Stocks for Years was originally published by The Motley Fool
