In Part 1 and Part 2 of this series I covered 12 of the 30 Dow Jones Industrial Average stocks that I considered the most expensive of the index. With this part 3 I will be looking at 6 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 am a believer that 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 that make up the 30 Dow Jones Industrial, this particular group of 6 contain many of my favorite companies. This includes those that I am currently long in as well as a few that I have previously owned. And there is also The Walt Disney Company 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 1.
The following portfolio review lists the next 6 most expensive stocks in the Dow Jones Industrial Average based on their current blended 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 such as expected growth need to be considered as well. I will elaborate more fully in the video below.
Portfolio Review: Six Fully Valued Stocks in the Dow Jones Industrial Average
The following portfolio review is presented in order of highest blended P/E ratio to lowest. As an additional valuation check, note that the earnings yield (EPS Yld) of each of these Dow constituents is still below my 6 ½ to 7% threshold but certainly closer than the companies reviewed in part 1 and part 2.
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. However, for certain constituents, I will also evaluate several other metrics. For any reader concerned with the current valuation of the stock market, this video, and the videos in Part 1 and Part 2, as well as the subsequent 2 videos that will follow in future articles, are must watches. Furthermore, although I will be only providing a cursory, or a pre-more comprehensive 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 that the Dow Jones Industrial Average sits near all-time highs and simultaneously is overvalued can be supported. On the other hand, I think the argument that the Dow Jones Industrial Average’s general valuation is far from bubble territory can also be supported. In other words, and as we’ve 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 doesn’t mean there’s 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 that I admire and that I believe can generate future business growth going forward. If that is done correctly, the market will take care of itself.
In Part 4, I will be reviewing the following: American Express Company, General Electric Company, J.P. Morgan Chase and Company, Merck and Co. Inc., Pfizer Inc. and The Travelers Companies.
— Chuck Carnevale
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Source: FAST Graphs
Disclosure: Long AAPL,JNJ,UTX,WMT at the time of writing.