Maybe stocks are cheaper than we think. When we see gigantic Dow Jones stocks jumping like small caps, helping the average trade through 23,000, we know that something's afoot and it isn't alchemy.
Plus the broader averages reflect this same sort of move.
What do I mean by the valuations not being that expensive? Okay let's start with some household names. This morning Johnson & Johnson ( JNJ) , the company with the best balance sheet of any major American enterprise, reported a blistering number with pharmaceutical sales up 15%. That's amazing. That's turbo charged growth. Yet, on a price-to-earnings valuation, the only realistic albeit arcane way to measure the worth of company, this stock sells at 17 times earnings. How is that possible? How does that make any sense ? I mean Colgate ( CL) , which, frankly, hasn't invented anything, sells at 26 times earnings. Clorox ( CLX) , which is an inventive company but only with a fraction of JNJ's growth sells at 24 times earnings.
Nelson Peltz, who very narrowly lost an election to the board of Procter & Gamble ( PG) is upset that the world's largest consumer product company doesn't innovate more and yet it sells at 22 times forward earnings.
And JNJ sells at 17 times earnings? You could say that all of those other stocks should sell dramatically lower, but I am not going to go there. I think they are expensive and JNJ is cheap.
Or how about United Health ( UNH) ? This $200 billion market cap health insurer just reported 21% revenue growth yet it sold at just nineteen times earnings until today. That's a substantial discount to the growth rate. Now you could say that earnings from operations only grow 13% but still, 19 times earnings for 13% growth? That, too, is absurd.
Morgan Stanley ( MS) with a steady as she goes wealth management business that is just getting better and better with increasing growth margins and a pretty much by clockwork business model, sells at sells at 14 times earnings. Morgan Stanley is one of the best investment firms in the world with consistent growth. I don't get that valuation at all. No more than I get that JP Morgan ( JPM) is selling at 14 times earnings with the best growth I can recall, the lowest non-performing loans I can remember and a new rate cycle ahead that could raise earnings by billions of dollars and the company doesn't have to add a soul to its ranks to get that return?
I am telling you as someone who watches earnings and knows how much people paid for them historically, these prices just don't make any sense to me.
Same with Goldman Sachs ( GS) . Okay, so was the quarter perfect? No, its business model has not migrated enough to a less trading oriented beast. But it is getting there. I don't know a soul in banking that doesn't want to go there. Its tangible book value is at $200 a share, which means if you closed the damned place that's how much cash it would have on hand. It's been buying back stock buy the millions of shares a quarter. And it is going to earn $20 a share next year. Shouldn't this stock get a 15 multiple and not its 12 multiple now?
Remember, we have no other historical way to measure value than the ones I am throwing at you and they make little sense to me. I believe that after a few days of selling that come from partners being able to take advantage of a selling window, this one will be ready to buy, too.
Some industries truly make no sense to me. The airlines sell between eight and 10 times earnings and yet they have never had this level of profitability in history. Their balance sheets are amazing. After some turmoil in price cutting the numbers are stabilizing. Now normally I would say, hold it, be careful, they are flush, they will buy more planes, they will offer more flights and their numbers will get crushed.
But you know what? The queue for more planes is miles long. Our infrastructure is so pathetic they can't add many gates any longer. And the price increases for all of those niggling things like baggage weight and seat selection are sticking!
We've gone over the re-rating of General Motors ( GM) several times now, but can you believe this is the company with autonomous driving coming to Manhattan NOW? Even after the run this stock has had, it sells at seven times earnings, Come on Man!
Or how about Allergan ( AGN) . Look, I am well aware of how pathetic this stock has traded. It is down fifty straight bucks on the possible loss of patent protection involving its Restasis drug that has less than $2 billion in revenue. It's lost more than $15 billion on exclusivity of one drug. It sells for 12 times earnings? I can't figure that out. I just can't. Even the bears are expecting an up year.
Now I know there are anomalies that make us think the stock market is expensive. We have watched the stock of what had once been the world's largest industrial, GE ( GE) , just get clobbered as new CEO John Flannery tries to get around everything from the ill-advised buying high of an infrastructure business and oil and gas while it sold finance at the low. It couldn't have been worse at GE and it is not getting better soon. Hopefully on Friday, when GE reports, we will get a clearer view of how much it might have to cut its inflated dividend. I say inflated because there's been some very suboptimal reporting tactics at this firm by not one but two former CFOs that has been, in my vocabulary, just shameful.
And we have some stocks that are front and center that just cannot be explained by conventional earnings measurements and that makes people very wary. Tesla ( TSLA) , Netflix ( NFLX) and Amazon ( AMZN) are all companies with valuations that older investors are just furious about, even as a paucity of younger investors gather to buy. Why is this? because they think Tesla is a tech stock, and Netflix and Amazon are bargains because a Netflix monthly fee is less than going to the movies to see one ridiculously horrible film instead of an engrossing series, and because Amazon's valued on its ability to take over the world and the gross margins of everyone else in retail. Very hard to figure.
At least Alphabet ( GOOGL) and Facebook ( FB) can be more than justified on a price to earnings basis out the next couple of years because they are incredibly lucrative. If Facebook can earn nine bucks in 2019 wouldn't you pay 25 times earnings for the world's fastest growing large capitalization stock?
Finally there's Apple ( AAPL) . Here's a company that is denigrated at every turn by the tech analysts who follow it. Yet I often want to ask them, do you use Samsung?
I mean really.
Okay, is it a pioneer in artificial intelligence the way Amazon and Spotify are? No, Does it have the edge in social and cloud and machine learning? No. But does it have the best consumer product company in the world? Of that there is no doubt and it could charge double for its service revenue and there would be nowhere else to go because it is a seamless ecosystem. Yet it sells at 17 times earnings and I am not backing out its enormous hoard of cash because that's not the way you do it.
I tire of hearing how expensive stocks were. I traded in 1987 when we crashed this week. Stocks were at 29 times earnings. Interest rates were at 7%, a much better alternative than now. We deserved to crash for heaven's sake. If we do it this time? You better have some cash as it will be an even bigger gift than when it crashed 30 years ago.
I hear people say, but Jim this is peak earnings and as I wrote earlier you know I am worried about DRAMs and flash memory and therefore about Lam Research ( LRCX) . I hear them say "but Washington can't get anything done." Do you see anything about tax reform being approved here? I hear them say, "wait until the fed raises rates," but we have already had a bunch of raises and we've done fine. I hear them say that "it is all a Fed bubble." Guess what. We have now almost tripled in the Dow from when I first heard those arguments. Yes, they are as cogent now as they were then. But did they make you money? No. And isn't that the ultimate arbiter?
