Introduction
In part one and part two of this series, I covered 12 of the 30 Dow Jones Industrial Average stocks I considered the most expensive of the index. In part three, I will be looking at six additional Dow stocks that, for the most part, I would consider fully valued to only moderately overvalued. What this suggests is that although I am not inclined to add new money at this point, I would not be anxious or worried about selling them at these levels either.
Successful long-term investors need to be willing to own stocks through the inevitable peaks and valleys that will come along the way. Investing is not easy, and I believe the more times you put yourself in a position where you need to make a decision, the more opportunity you have to make a mistake. Furthermore, price volatility neither hurts you nor does it enrich you - unless you take action. Consequently, unrealized gains or unrealized losses are simply scorecards, but the only score that matters is the one when the game is over.
Although there are many quality companies making up the Dow Jones, this particular group of six stocks contains many of my favorite companies. This includes those I am currently long in as well as a few I have previously owned. There is also The Walt Disney Co. (DIS, Financial), which I have long admired but never seemed to have capital available when its valuation was attractive. Nevertheless, this particular group of Dow stocks has significantly different long-term track records and histories than we saw with the more cyclical stocks reviewed in part one.
Portfolio review: Six fully valued stocks in the Dow Jones Industrial Average
The following portfolio review lists the next six most expensive stocks in the DJIA based on their current blended price-earnings (P/E) ratio. However, there are many ways to value a stock in addition to the P/E ratio. 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 like 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 still below my 6.5% to 7% threshold, but certainly closer than the companies reviewed in parts one and two.
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 videos in parts one and two as well as the subsequent videos in future articles are worth watching. Furthermore, although I will only be providing a cursory due diligence analysis, I believe you will find the video enlightening and, hopefully, entertaining.
Summary and conclusions
We have now covered approximately 60% (18 of 30) of the companies that make up the Dow Jones Industrial Average. Importantly, we have seen no real bargains in any of the companies reviewed thus far. Consequently, I think the argument the DJIA sits near all-time highs and simultaneously is overvalued can be supported. On the other hand, I think the argument the index’s general valuation is far from bubble territory can also be supported. In other words, and as we have seen thus far, more than half of the Dow stocks are fully valued to overvalued. Therefore, although I do consider the Dow Jones generally expensive, I do not consider it dangerously so.
Moreover, as I state ad nauseam, it is a market of stocks and not a stock market. So even though many Dow stocks are richly valued, that does not mean there is not money to be made going forward. The bull market remains robust, and many of the companies in the Dow are poised to grow. To me, this has always meant choosing companies I admire and consider attractively valued. So instead of worrying about market levels, I try to find attractively valued companies I admire and I believe can generate future business growth going forward. If done correctly, the market will take care of itself.
Disclosure: Long AAPL, JNJ, UTX, WMT 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.
