Did you know that achieving a 10% return over a period of 25 years would turn a $5,000 investment into more than $54,000? And that’s just if you average the S&P 500‘s long-run return of 10%. If you invest in market-beating stocks that average greater returns, then your investment could be worth even more than that. At 15%, that investment would grow to nearly $165,000. If you knock it out of the park and average 20%, then that $5,000 investment would be worth close to $477,000.
Those would be incredible returns — and they wouldn’t be easy to achieve. One way you can increase the odds of netting a big return is by investing in stocks that have low valuations today, and that investors may be discounting too heavily. Two stocks that look like they fit those criteria right now are Alibaba Group Holdings (BABA 2.01%) and Chevron (CVX 0.30%).
Here’s why investing $5,000 into one or both of these stocks could be a great move for long-term investors.
1. Alibaba Group Holdings
Alibaba Group is one of the largest Chinese stocks in the world, with a market cap of $180 billion. But it has been struggling for multiple years. Poor relations between China and the U.S. have resulted in investors being bearish on the e-commerce stock. Its sluggish growth rate hasn’t been all that exciting, either.
The stock has declined by a whopping 70% in just three years, and investors are paying a multiple of only 7 times its estimated future earnings to own a piece of the company. That’s a dirt cheap multiple, as the S&P 500 average is nearly 22.
The valuation appears too low because while Alibaba has struggled to generate growth in recent years, it has been improving in recent quarters. COVID restrictions have affected the Chinese economy in recent years, but in the long run, there’s still lots of potential for the e-commerce giant to succeed.
Alibaba could potentially be a big player in artificial intelligence (AI) as well, rolling out its own chatbot last year — Tongyi Qianwen. In October, it launched its second version of the chatbot. And with 80% of Chinese tech companies using Alibaba Cloud, the company could have plenty of opportunities to upsell its customers on the latest, cutting-edge AI technologies.
For AI investors, Alibaba could make for an underrated buy. A $5,000 investment in this stock has the potential to go a long way in the future.
Chevron’s stock has done well over the past three years, with its share price rising by 54% during that time, thanks to rising oil prices. But recently, investors have been less bullish as Chevron’s valuation has dipped 17% over the past 12 months. However, it’s inevitable that as oil prices rise and fall, so too will Chevron’s valuation, since the oil and gas producer depends so much on the price of the commodity.
The oil and gas stock is trading within $10 of its 52-week low, and its forward price-to-earnings multiple is just 11. Investors are getting a potential bargain of a buy for one of the top oil and gas companies in the world. Chevron is also one of the top holdings in Warren Buffett-owned Berkshire Hathaway‘s portfolio, representing 4.5% of its total value.
A big reason investors may want to buy shares of the stock, besides just its low price, is that Chevron also offers a high yield of 4.1%. The company has also increased its dividend for 36 consecutive years.
While investors may worry about the long-term prospects of a top oil and gas producer at a time when global economies are trying to be greener, the company is attempting to do its part. By 2028, Chevron plans to invest $10 billion into investments and projects aimed at reducing carbon emissions. It’s also investing in hydrogen and renewable fuels.
For investors willing to take a bit of a contrarian position on this oil and gas giant, there’s the potential for this to also be a market-beating investment in the long run.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Alibaba Group and Chevron. The Motley Fool has a disclosure policy.