We keep hearing how darned expensive this stock market is, that it's way out of whack with historic valuations, that it's extended well past what can be justified.
I can't disprove it. I can't contest it. On days like today, when we flirt with record highs after so many up days in a row, it just seems pretty ridiculous, frankly, that we can go still higher. With the S&P 500 priced at almost 22x earnings, way high versus where it has been, we don't really have a lot of historical grounding for being at these levels.
Sure, I remember trading back in October 1987, right before the crash, when we clocked in at 29x earnings, which was just plain outrageous when you consider that interest rates -- the real stock competition -- were much higher back then.
Still, given how all we hear from Washington is that President Trump's agenda of lower corporate taxes and repatriation of vast sums from overseas seems totally held up by dysfunction and rancor in Congress -- even as Republicans own both houses -- can these prices be justified?
I know I am mystified each day. I know a selloff is inevitable. I know we are due.
But let me tell you what keeps happening to make it so you wonder whether the future price-to-earnings multiple may be lower than we think. Companies keep beating earnings estimates and raising their forecasts, rendering the current price-to-earnings marks worthless.
No, I am not rationalizing reasons to buy.
I am just stating facts.
Take yesterday. Home Depot (HD) and Walmart (WMT) , the largest do-it-yourself merchant and the largest discounter, reported surprisingly great quarters. Not good, but great. Both of them gave you ample opportunity to raise estimates. If you thought Home Depot was expensive going into the quarter, you found out otherwise after you listened to the conference call. I was primed for disappointment from Walmart. It did the opposite. It showed more profitability, including online profitability, than I expected.
These were two Dow stocks that seemed overvalued until you heard their earnings calls. Then you knew otherwise.
The same thing happened with Cisco (CSCO) last week. If you looked at Cisco's previous quarter, you would have been ready for a downbeat quarter. CEO Chuck Robbins himself wasn't happy with the numbers. But in 90 days, through some big wins and some very positive acquisitions as well as an improved macro backdrop, Cisco went from being a potentially expensive stock to one that stands out as being ridiculously cheap at 14x next year's earnings. This was a transformative quarter for Cisco. It showed far greater profitability than I would have hoped, but you had to understand that the profitability is being hidden by its conversion into a software company with a hardware base. We own Cisco for the Action Alerts PLUS club and we found ourselves telling subscribers the stock is way too cheap versus what amounts to a new Cisco. The current price can't be justified by all the good that's happening.
The exact same thing happened earlier this month with Visa (V) when it reported. The last quarter was a tad weaker than I expected and you would have figured that you would get a repeat of the situation. Nope. As CEO Al Kelly told us last week when Mad Money went to San Francisco, there was acceleration in pretty much every venue out there and business has gotten much better in the last few months. If you thought the stock of Visa was expensive going into the quarter, again, you realized it was too cheap coming out.
But it's not just earnings that are making it hard to bet against this market.
You know what is the most expensive consumer packaged-goods stock I follow? Procter & Gamble (PG) . It sells at 23x next year's earnings, which is pretty amazing for a slow-growing but admittedly blue-chip company.
Nevertheless, Nelson Peltz's Trian has just taken a huge position in the stock, something that has almost always led to further appreciation of a stock. In fact, if you bought after Peltz announced a new position, you almost always made money, a record we have not been able to find among other large shareholders who engage management and suggest prudent ways to cut costs and produce higher earnings.
Peltz was in on another Dow stock that's been roaring here, DuPont (DD) , as its deal with Dow Chemical (DOW) looks to close soon. Yes, DuPont seems very expensive on 2017 earnings, but not if the combined company is about to split into three companies, as DuPont CEO Ed Breen has promised. When that deal closes, you go from an overvalued DuPont to an undervalued Dow-DuPont. How can you say this Dow member is overvalued when it won't even exist as a company a few months from now?
It's not just the Dow stocks that have been hard to bet against. Lately, Bristol-Myers (BMY) has had an extremely hard time with its key Opdivo drug, its breakthrough anti-cancer formula that's been proven to be inferior to Merck's (MRK) Keytruda in some very important lung cancer tests. The misstep has caused Bristol to lose a tremendous amount of market capitalization and yet it still isn't a cheap stock on earnings.
But what happens this morning? We discover that Carl Icahn has taken a big stake in the company and is making noises about how it can be taken over. Here's a company that's estimated to be at 20x next year's earnings, yet I think the estimates are most likely too high because of the eroding Opdivo franchise. I know a bunch of people who were short the stock betting that the next quarter will be even weaker than this one.
But there's Carl in there agitating and next thing you know maybe it does catch a bid? Then who cares how expensive it might be.
Kind of reminds me of Apple (AAPL) when Icahn left the stock thinking it could be too expensive based on, among other reasons, flagging sales in China. But what a difference a quarter makes, as we saw earnings actually accelerate and the service stream come into view as a recurring revenue business, kind of like the razor-blade model we like so much for P&G's Gillette.
What's so important about all these situations? Not one is being made cheaper by the president's agenda. Sure, there are people who may be bidding these stocks up on the hope of repatriation and lower corporate taxes. And I have no doubt that eventually something good will happen on both counts given that the leadership of all parties favors these kinds of tax reforms. I now just don't expect anything to happen until maybe late 2017 or early 2018 because of the press of other business.
In the end, though, every time you want to give up on a stock, any stock, something good seems to happen. You want to give up on Popeyes Louisiana Kitchen (PLKI) because nobody seems to care about all the great work CEO Cheryl Bachelder has done? Bam, Restaurant Brands (QSR) pays $79 for a low-$60 stock. Kraft Heinz (KHC) disappoints you on Thursday by not talking about an acquisition strategy we so want? The next day it bids for Unilever (UL) and its stock soars almost 10 points. (Dow Chemical, Kraft Heinz and Apple are part of TheStreet's Action Alerts PLUS portfolio.)
It just keeps happening.
So, yes, we stipulate that the stock market is expensive. But no, we can't stipulate that individual stocks are expensive given better-than-expected earnings, potential takeouts and, yes, the possibility down the road of a better tax regimen. So bet against the market. Scream to the rafters about how it should be sold. Just remember that the indices contain companies that have CEOs who are bettering the situation as we talk and understand that there are real reasons for the rally and they simply aren't going away despite the remarkable ascent we've had since Election Day.