Investing like Warren Buffett isn't easy. Everyone remembers Berkshire Hathaway CEO Buffett's dictum about being "fearful when others are greedy, and greedy when others are fearful." Still, it's a lot harder to put into practice, not least when the three stocks discussed here, namely UPS (UPS +1.43%), chemicals company Celanese (CE +1.96%), and oil major Chevron (CVX +1.43%), face obvious headwinds in 2023.
That said, if you are prepared to be patient and want to invest as Buffett does through his holding company, all three of these stocks look like great value opportunities.
NYSE: UPS
Key Data Points
1. UPS will see better days
The economy is slowing, and that's usually bad news for companies that rely on economic activity for their growth. In UPS's case, that activity is package deliveries, whether it's to and from the consumer or a transaction from a business customer. The company's U.S. delivery volumes were weaker than expected in the first quarter of 2023, and management accordingly lowered its full-year revenue and margin expectations.
While that's never good news, it must be put into context. The reality is UPS enjoyed a couple of bumper years due to the stay-at-home measures boosting demand for deliveries, and some retraction is natural. Moreover, the Wall Street analyst consensus for earnings per share in 2023 is $10.77, meaning UPS stock trades on less than 16 times full-year earnings. So while further deterioration in market conditions could occur, it's worth noting that this would be a very attractive valuation for a company in a trough year.
Meanwhile, the company continues to expand its initiatives to refocus its business on key end markets like small and medium-sized businesses and healthcare and away from lower-margin business-to-consumer deliveries for the likes of Amazon.com.
As such, you can expect UPS to emerge as a stronger company from the slowdown, and the current valuation (which also offers a 3.8% dividend yield) is attractive.
NYSE: CE
Key Data Points
2. Celanese, near-term downside, long-term upside
There's no way to sugarcoat matters. Chemical companies' broad exposure to the economy means they will always have highly cyclical revenue and earnings. This is exacerbated by the typical tightness in supply and demand -- all it takes is an unforeseen rise in demand, and prices are soaring, while a drop in demand brings about the opposite.
Listening to Celanese's recent first-quarter earnings call, there's no doubt the slowing economy is having an impact, with CEO Lori Ryerkerk noting, "The pace of demand recovery has flattened in April and May relative to expectations. This is impacting not only our volumes sold in the second quarter but also our ability to lift pricing and fully leverage moderating raw material costs."
It gets worse: "We are seeing the demand in the second quarter not build as quickly as we had thought at this time last quarter." As such, management lowered its full-year earnings expectations to $11 to $12 per share from $12 to $13 previously.
The low end of the updated guidance would put Celanese stock on less than 10 times earnings at the end of 2023. That's an attractive valuation for a cyclical company whose earnings could trough this year. If you buy Celanese stock, you should prepare yourself for potential turbulence, as there's no guarantee conditions won't get worse in the near term.
NYSE: CVX
Key Data Points
3. Chevron, a rock-solid balance sheet
The market is "fearful" of Chevron for two reasons. First, it's the near-term threat of a slowing economy leading to a decline in the price of oil. Second, the long-term danger comes from the shift in using renewable energy as a fuel source.
The latter is a concern, but the reality is that fossil fuels will still be an integral part of the U.S. economy in the coming decades. Even if U.S. demand declines, there's always the export market (oil is a commodity), and Chevron has assets in Australia, Africa, and Argentina.
As for the near-term risk, it's tough to predict where oil prices will go, but it's worth noting that in previous sharp slowdowns in manufacturing activity, the price of oil contracted much more than it did in the last year.
Data by YCharts.
Moreover, the oil majors (including Chevron) have been much more moderate in their ramping capital spending in response to relatively high prices. In addition, Saudi Arabia and other OPEC members have already cut production this year in a demonstration of a willingness to support the price of oil.
Data by YCharts.
Like UPS and Celanese, Chevron has been focusing on improving the underlying profitability of its business through the economic cycle. As such, management believes it will more than double the amount of free cash flow (FCF) in 2027 compared to 2022, with the price of oil modeled at $60 a barrel.
That's useful to remember because it implies strong growth in Chevron's FCF and the potential to ramp its dividend if the oil price stays above $60 a barrel. All told, Chevron stands well-placed to grow cash flow, earnings, and dividends for investors for years to come.
