Limited pool of stocks at attractive valuations in current market.
Selective large cap dividend stocks such as KO, MCD, BP still appear to offer attractive valuations.
Questions still need to be answered as to whether growth drivers for KO, MCD and BP remain in place.
As the stock market continues to soar, it's becoming increasingly more difficult to find reasonable value. My interest has been attracted to a couple of stocks recently, but I'm increasingly of the view that the lack of value that's around is delivering a message that's becoming harder to ignore.
I posed the question at the beginning of last year as to whether we were in a "new bubble". At that time, the Dow Jones Index was hovering somewhere around 14,000. I ended up concluding that we weren't in a bubble at that time, based on what appeared to be pretty reasonable valuations of the index as compared to historical valuation ratios. Fast forward just over a year, and the index is up at around 16,300, and likely will still heading higher. That's a nice move up of more than 16%, thanks largely to the strong gains of 2013.
Whether we are in a bubble or not, it's getting increasingly harder to find value. Certainly it's getting increasingly harder to find value in positions that I don't already own.
Having said that, here's where I've been seeing some opportunities.
Large Cap Dividends
If you were to pick areas where value still does exist, I'd say that selective large cap dividend players still do offer it. The problem is that many of them have been offering the same "value" for the better part of a year or more. My positions in many of these large cap dividend players are already pretty significant, and I'm not really sure that I'd like to increase any of these beyond that levels I currently own. Large cap dividend companies play a very important role in my approach to portfolio construction. In fact, large cap dividend players account for the majority of my $28k in annual dividend income.
Here are stocks that I believe still offer some measure of value in the current market.
Coca Cola (NYSE:KO)
Coca-Cola has been unable to see sustained share price appreciation for the better part of almost 2 years. The stock has been fairly range bound over this period and hovering around the $40 mark. The reasons for this seem to be fairly obvious. The US market growth has been pretty weak, with consumer preferences trending away from carbonated beverages to healthier options. Coca-Cola has been investing in these healthier options, but it will take additional time for these new businesses in waters and juices to make a sustained contribution to revenue and profit. That said, international growth in carbonated beverages is still very strong. Coca-Cola should continue to ride favorable volume growth trends throughout Asia and Latin America.
If you believe that the carbonated beverages consumption trend has reached a ceiling, then Coca-Cola may just be a value trap. On the other hand, if you feel that the company's still retains its touch in following the pulse of what consumers are drinking, then this could be a good time to pick up shares. I've got a large long position in Coca-Cola. I'm not looking to add anything more at these levels.
McDonald's is another classic large cap dividend payer that's also been fairly range bound since early 2012. McDonald's has been caught up in worries of market saturation and flat North American and European same store sales for the past couple of years. Every decade or so, McDonald's seems to have investors wondering whether the company can pull out another trick to keep the growth going. To the company's credit, it's been able to find a few additional arrows in its growth arsenal that it has been able to deploy. McDonald's has successfully launched a breakfast offering, as well as a McCafe line of pastries and coffees. McDonald's has also made a mark with healthier eating options, and additionally managed to generate significant operating efficiencies to power operating margins more than 10% higher in the last decade and delivered a real earnings tailwind.
If the belief is there that McDonald's isn't out of options to tweak menus and introduce new offerings to see further spikes in its earnings profile, then this could be a very good time to benefit from a nice 3.3% yield. Again, I have a rather large existing position in McDonald's, accumulated at current price levels, so I won't be looking to add more shares at these levels.
While BP has had a nice rebound in its stock price over 2013, the company is still well under industry averages on most measures, including Price/Earnings, Price/Sales and Price/Book. With questions around the ultimate size of the settlement for the Gulf of Mexico incident still outstanding, and additional fines and penalties for gross negligence still possible, there looks to be a large legal overhang on BP's stock that is depressing the current stock price.
BP still looks to have a fairly attractive valuation discount built into the current stock price. If the company is able to escape the worst of the penalties that are possible for a gross negligence finding and successfully litigate other pending claims well into the future, there's likely compelling value on offer at current prices. This is particularly the case given BP has recently been allowed to bid for rights to operate in the Gulf of Mexico.
While market wide valuations may appear stretched at present, there do appear to be selective pockets of opportunity in large cap dividend stocks for those willing to take a view that sustained growth for some of these market leaders is likely to continue into the future.
Disclosure: I am long MCD, KO, BP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.