Despite the precipitous decline in FAANG and tech stocks this year, blue-chip stocks are having incredible runs. Some are calling it the revenge of the Dow. Many of the stalwart, iconic American companies are trading at or near all-time highs. But are they investable at these levels and what does it mean for the market?
Below is a sampling of high-quality stocks trading at very high levels.
Consumer Stocks
McDonald's Corp. (MCD, Financial), the largest restaurant chain in the world, seems to be rolling despite labor shortages and inflationary pressures. In the most recent quarter, same-stores sale increased 9.5% on a global basis as the company invested in digital offerings and other relevant marketing. McDonald's is considered a defensive stock with its low-cost comfort food offerings, but with only $10 in estimated earnings per share this year, the company is trading at 27 times earnings. Major upside from here is likely limited.
The large food producer Kellogg Co. (K, Financial), which produces popular food items such as Frosted Flakes and Pringles, is also putting up some good numbers. During the second quarter of 2022, organic net sales increased 12.2%, driven by price increases and strength in snacks, noodles and international cereals. Currency neutral earnings per share increased 7.9%. The company is selling at approximately 18 times this year's earnings and has an enterprise value/Ebitda ratio of 14. The dividend yield is strong at 3% and provides support, but investors may be better of waiting for a lower entry point to create a margin of safety.
Another large-cap consumer food and beverage company that has been putting up strong sales growth is PepsiCo Inc. (PEP, Financial), the purveyor of iconic soft drink brands and food labels such as Frito-Lay and Quaker Oats. Third-quarter organic revenue increased 16%, driven by price increases and strength in certain food products and various international markets. Pepsi stock is currently trading at about 27 times earnings and at an enterprise value/Ebitda ratio of 18. With the stock trading near all-time highs and elevated valuation levels, near-term upside is likely very limited.
The largest candy brand in North America has long been the Hershey, the flagship product of The Hershey Co. (HSY, Financial). This large confectionary and snack company has had a strong run and is now selling close to all-time highs. Like most consumer products companies, Hershey showed strong revenue growth of 14.1%, driven by price increases and solid consumer demand. The company has historically traded at above-market valuations due high returns on capital and the defensive nature of candy, but at 29 times estimated earnings, current valuations are somewhat extreme. Candy is not a high-growth category long term, so a enterprise value/Ebitda ratio of 20 times leaves little room for upside from here.
Energy stocks
Another industry that is selling near or at all-time highs are oil stocks. Chevron Corp. (CVX, Financial) recently reported massive profits totaling $11.2 billion, which almost doubled from the prior-year period. The stock usually sports a very strong dividend yield, but with the stock trading at all-time highs, the dividend yield has dropped to only 3.16%. Most valuations for the company are very low, but energy companies' earnings are very volatile and can be cut in half or even turn to losses as oil and natural gas prices drop. Exxon Mobil Corp. (XOM, Financial) is roughly the same story as organic earnings grew to $18.7 billion from $6.7 billion in the prior-year period. Exxon’s dividend yield has dropped to 3.29% as the stock trades near all-time highs. Upside is likely limited for these two companies from these levels. History tells us that the usually the best time to buy energy companies such as these is when oil prices are low and the companies are struggling with operating losses.
Health insurance stocks
Health insurance companies are also trading near or at all-time highs. One of the leaders this industry is Cigna Corp. (CI, Financial), which has over 190 million customer relationships around the world. The company has been reporting strong results, driven by increasing customers, price increases and lower utilization of medical services. Valuations seem to be a little stretched as the company is trading at approximately 18 times current year earnings and an enterprise value/Ebitda ratio of 12. Insurance companies have volatile earnings and typically to not trade at high multiples. Another large competitor is Humana Inc. (HUM, Financial), which has over 17 million members in medical benefit plans. The company trades at even higher multiples than Cigna with a GAAP price-earnings ratio of 27 and an enterprise value/Ebitda ratio of 16. The dividend yield for Cigna is 1.38% and only 0.56% for Humana. Upside for these two companies appears to be very limited as multiple expansion seems to be unlikely and membership growth will likely be in low-single digit range for the foreseeable future. Investors may be better off waiting for 52-week lows as opposed to investing at 52-week highs.
