Cheap or expensive? That's what you have to be thinking when you look at so many stocks in this market that have incredibly low price-to-earnings multiples.
So many market participants, particularly those who have sat out this amazing bull run, perhaps because they hate Trump, perhaps because of the inverted yield curve and the purported recession, feel the need to tell you how expensive this market is. They are typically using price-to-earnings ratios and are often thinking of the Church & Dwights (CHD) or the Coca Colas (KO) or the Oktas (OKTA) and the Workdays (WDAY) and ServiceNows (NOW) .
I respect that. I am not saying those are cheap.
But I am saying a tremendous number of household brands aren't expensive at all. They are downright cheap... unless we do have a recession.
Let me just count some down so you know what I mean.
First, the autos. Ford (F) has a 6x and change P/E, GM's (GM) got a 5x. That's a little frightening and it says that a recession will be happening in a couple of quarters and the earnings will just fall apart. In Ford's case, it's dividend, at 6.8%, gets cut as that's unsustainable especially when it's about three times the risk-free fixed income competition, although the Deep Staters, whoever the heck they are, would doubt the full faith and credit of the United States. These two stocks are at the fulcrum of the cheap versus expensive storyline.
Next up, Micron Technology (MU) . I have said over and over that this stock is the key to the market, because it reported a good number but took down the next quarter but not the year. It has a gigantic buyback, which clearly kicked in $10 below where the stock was when it got lit up. It's holding, holding at a 7X P/E, which means earnings will collapse in 2020. I am not so certain. I think you can start buying it but it might test the $30s again.
Goldman Sachs (GS) and Wells Fargo (WFC) are at 8x and 10x earnings. Goldman is the premier investment bank, at least when you are trying to get a job in investment banking. It's also the bank behind the Apple (AAPL) card -- even if Apple says that it's not a bank in its advertising. Technically, they are right. In reality, it's a $5 billion business for Goldman. Either way, that's an awfully low multiple.
Wells used to be the premier bank in America. Now it's anything but. However, it just got a new CEO, Charlie Scharf, who is known for his love of technology, discipline and expense control. If you ask me those are the three things Wells Fargo is worst at. Both could be huge buys ahead of the quarter.
Finally, there's the retailers: Kohl's (KSS) with an 8.9x P/E, and Macy's (M) , absurdly, with a 5.2x P/E. Kohl's stock yields 5.7% while Macy's yields 10%, something again that's clearly unsustainable if the multiple is signaling a terrible year.
The market is judging all of these stocks extremely harshly. Is the market right? Yes, if we are going into a recession. No, if we stay out of one.
Dealer's choice. You are the dealer.
