Introduction
In part one of this five-part series, I covered what I considered the six most expensive stocks in the Dow Jones Industrial Average Index, which is composed of 30 stocks. In part two, I am going to cover six additional Dow stocks I consider overvalued currently. So far, these two articles represent approximately 40% of the stocks in the Dow Jones that appear overvalued. However, this group of stocks generally has very different fundamental characteristics than we saw with the first group. With our initial group of six, we saw, for the most part, cyclical operating histories. With this group, we will examine six stocks with more consistent operating histories.
Personally, and as a general rule, I tend to favor companies with long-term, consistent operating track records. Much of my preference can be attributed to the opportunity for more reliable forecasting. Although there are exceptions to every rule, companies with consistent operating histories tend to persist over time. As they get larger, their growth rates may slow down a little, but their consistency of performance is comforting. Although past performance is no guarantee of future success, a long-term, consistent track record is worth acknowledging and giving credit to.
Additionally, this group of Dow constituents will also illustrate one of the underlying objectives of this series, suggesting it is a market of stocks, not a stock market. Common stocks come in all sizes, shapes and flavors. Just as it is for larger indexes, it also holds true for the Dow Jones. Therefore, I always suggest it makes more sense to worry about the specific stocks you own over obsessing what the market might or might not do. Because, as this series unfolds, you will discover there are, in fact, Dow stocks that are attractively valued. As a sneak preview, we will not see attractively valued Dow stocks until we get to parts four and five. Stated more precisely, I believe approximately 60% of the 30 Dow stocks are overvalued, but there is attractive valuation with some of the other 40%. Stay tuned for the future installments.
Portfolio review: Six more expensive stocks in the Dow Jones Industrial Average
The following portfolio review lists the next six most expensive stocks in the Dow Jones Industrial Average based on their current blended price-earnings (P/E) ratio. There are many ways to value a stock in addition to the P/E ratio, however. Consequently, I suggest the reader also notices the price to cash flow of each of these six Dow constituents. For those investors most interested in dividend income, price to cash flow might be more relevant for higher-yielding, dividend-paying stocks. Furthermore, when ascertaining valuation, other factors such as expected growth need to be considered as well. I will elaborate more fully in the video below.
The following portfolio review is presented in order of highest blended P/E ratio to lowest. As an additional valuation check, note the earnings yield (EPS Yld) of each of these Dow constituents is below my 6.5% to 7% threshold.
FAST Graphs analyze-out-loud valuation analysis
This video will present a quick overview of each of these Dow constituents, based primarily on price relative to earnings and cash flow. For certain constituents, I will also evaluate several other metrics. For any reader concerned with the current valuation of the stock market, this video, the video in part one and the subsequent videos in future articles are must-watches. Furthermore, although I will be only providing a cursory due diligence analysis, I believe you will find the video enlightening and, hopefully, entertaining.
Summary and conclusions
In part one of this series, I covered what I considered the six most expensive stocks in the Dow Jones. In part two, I added and covered six more expensive Dow stocks. As a result, approximately 40% of the Dow Jones Industrial Average constituents have been reviewed. In part three, we will be looking at six additional Dow Jones stocks I would consider more fully valued than overvalued. Attractive valuations will not be found until we get to parts four and five.
To summarize what we have seen so far, the Dow Jones Industrial Average remains at all-time highs. However, and much more importantly, we have now discovered that 40% of the 30 Dow Jones Industrial Average constituents are overvalued relative to fundamentals and historical norms. High valuation is a precursor to low future returns. Therefore, it seems logical to expect a significant portion of the Dow Jones constituents are facing high valuation headwinds relative to future returns.
Therefore, several scenarios could be in play in the near to intermediate future. The overvalued stocks could hold their value or correct significantly. The undervalued Dow constituents I will be examining later could possibly increase as they revert to mean valuations. Of course, a major correction could drag all Dow Jones stocks down. However, I believe a strong case can be made that fairly valued stocks will recover better and more quickly. Nevertheless, it will be interesting to see.
Disclosure: Long KO, PG at the time of writing. The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
