When most people think of so-called "value stocks," they're referring to large, mature businesses that trade at relative discounts to their intrinsic value. These are also typically steady stocks that often (but not always) have substantial capital returns programs (think dividends and share repurchases) to effectively supplement share price appreciation for investors.
But I've always held a somewhat subjective view of exactly what it means to be a value stock. We're all value investors when you really think about it; every investor strives to buy stocks for less than they're truly worth. In my experience, that aim doesn't always directly equate to finding stocks that trade at "cheap" valuations as measured by traditional metrics like price-to-earnings (P/E), price-to-sales (P/S), or price-to-book (P/B) ratios.
More than anything, I believe value stocks must trade at a significant discount to their long-term potential worth. With that in mind, if you're an investor with, let's say, $5,000 to put to work, here are three "value stocks" I think are worth buying and holding for at least the next several years.
A solid high-yield dividend payer
Let's start with a relatively easy deep value candidate: AT&T (T +0.47%).
Even as tech stocks and the market as a whole have rallied nicely in 2023, shares of the telecom giant are down around 23% year to date as of this writing.
NYSE: T
Key Data Points
Perhaps most perplexing is that AT&T has so drastically underperformed despite the fact it is outperforming primary rival Verizon (VZ 0.40%) -- shares of which have fallen roughly the same amount over the past year -- on virtually all relevant metrics. AT&T gained 326,000 postpaid mobile subscribers in Q2, for example, with "historically low levels of churn," while Verizon lost 136,000 as its churn surged. AT&T gained 123,000 net prepaid subscribers last quarter, while Verizon lost 304,000. AT&T also continued to see strong momentum from its fiber internet business, adding 251,000 fiber customers in Q2, bringing its total to 7.7 million. And the company reiterated its guidance for generating free cash flow of at least $16 billion in 2023, all while simultaneously committing to identifying an additional $2 billion in cost savings beyond the $6 billion it's already saved as part of its ongoing debt reduction and cost-cutting initiatives.
Better yet, it's clear that AT&T's mouthwatering 7.7% annual dividend is safe, giving investors an attractive income opportunity if they're willing to buy and hold now with shares trading at a historically cheap forward P/E of only 5.9x and a price-to-book value of less than 1x.
A beaten-down entertainment empire
Next, Walt Disney (DIS +2.30%) shares are down around 24% from this year's highs and now trade near their lowest levels since 2014 -- both on an absolute basis and from a valuation standpoint at an almost 10-year low P/E ratio of 16.4. From multiple box office disappointments to the recent writer and actor strikes shutting down Hollywood, as well as doubts about waging a political battle with the governor of Florida that might well shape the future of its flagship Orlando-area resorts, the world's largest entertainment conglomerate can't seem to catch a break these days.
NYSE: DIS
Key Data Points
But let's not lose the forest for the trees. If you truly believe this is the end of Disney's reign atop the entertainment world, perhaps you should avoid the stock. Personally, however, I believe these are all short-term issues for the House of Mouse...and Marvel, and Pixar, and Lucasfilm, and the various entertainment properties the company astutely purchased through its massive acquisition of Twenty-First Century Fox several years ago. This is an enduring business with an incredible, enviable stable of entertainment IP to leverage -- though we should note that recently returned CEO Bob Iger has indicated he might be willing to astutely sell some of those assets in order to better position Disney for longer-term growth.
The market is understandably lamenting recent subscriber losses at the company's Disney+ streaming service. But here again, after rapidly scaling Disney+ to over 164 million subscribers within its first three years (as of last quarter the count had fallen to just under 158 million), I think the company is right to focus on the service's profitability now rather than chasing unprofitable subscriber growth.
Combined with the fact Disney has committed to bringing back its dividend -- with the first resumed payouts coming likely some time next year -- after putting its capital returns programs on hold in 2020 amid the COVID-19 pandemic, and I think investors who buy will be more than pleased with their decision.
A controversial "value" play in electric vehicles (and much more)
Before you call me crazy, hear me out: Tesla (TSLA +3.01%) is undoubtedly the highest-risk stock of this bunch -- but I also think it's arguably the most intriguing long-term value play.
In fact, my colleagues here at the Fool half-jokingly suggested I'd lost my mind when I first called Tesla a top value stock in June 2019, with shares trading at a split-adjusted $15 and change. Only weeks prior to that article, I'd noted that Tesla CEO Elon Musk had just teased the unveiling of what we now know as the Cybertruck, and was outlining plans to build a massive robotaxi fleet that, I wrote, "could be the catalyst to multiply the company's value to $500 billion" from around $40 billion at the time.
NASDAQ: TSLA
Key Data Points
So why, after a nearly 1,800% run and with a market cap of $835 billion today, do I think Tesla is still a compelling value?
It turns out neither of those catalysts -- the Cybertruck and robotaxi fleet -- were required to get Tesla to this point; the company still commands nearly 60% of the electric vehicle market today and continues to rapidly ramp its EV production roughly in line with demand. Meanwhile, Musk suggests the robotaxi fleet plans are closer to coming to fruition than ever before. And Tesla only began producing release candidate builds for its Cybertruck last quarter, with factory tooling on track to ramp production later this year to meet incredible demand.
Finally, we can't forget Tesla's solar and energy storage businesses, its plans to build humanoid robots, its specialized chip design expertise, and more recently its move into the massive market for AI software and services. These are all still at very early stages, but that's why Musk has suggested that "Tesla should really be thought of as roughly a dozen technology start-ups, many of which have little to no correlation with traditional automotive companies."
Not all of Tesla's irons in the fire need to pan out as planned; much in the same way as a single massive outperforming stock can drive the returns for an entire portfolio, if even a couple of Tesla's businesses change the world in a big way, I believe its stock will inevitably respond in kind.
