Have New Money To Invest? Which Sectors To Buy? Which To Avoid? Part 2

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Includes: AAPL, AEP, AMZN, CMCSA, CSCO, D, DIS, DUK, FB, GOOG, GOOGL, HD, INTC, LOW, MCD, MSFT, NEE, NKE, PCLN, SBUX, SO, SPY, T, TWX, V, VZ, XLY
by: Canadian Dividend Growth Investor

Summary

Which sectors are too expensive for new investment dollars?

In the Consumer Discretionary sectors, there's reasonable value found in Time Warner and Disney.

On dips, buys may be warranted for high-growth companies such as Home Depot, Lowe's, Starbucks, Nike and Priceline.

In Part 1 of the series, the utilities and technology sectors were covered. Particularly, the valuations of these companies were reviewed to see if they're worth investing in at current prices: NextEra Energy, Inc. (NYSE:NEE), Duke Energy Corporation (NYSE:DUK), Southern Company (NYSE:SO), Dominion Resources, Inc. (NYSE:D), American Electric Power Company Inc (NYSE:AEP), AT&T Inc. (NYSE:T), Verizon Communications Inc. (NYSE:VZ), Alphabet Inc. (NASDAQ:GOOGL)(NASDAQ:GOOG), Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), Facebook Inc. (NASDAQ:FB), Intel Corporation (NASDAQ:INTC), Cisco Systems, Inc. (NASDAQ:CSCO) and Visa Inc. (NYSE:V).

In this article, we shall explore the Consumer Discretionary sector. Particularly, we will look at the valuations of the top 10 holdings (based on index weight) of the Consumer Discretionary Select Sector SPDR ETF (NYSEARCA:XLY). The ETF yields 1.8% compared to SPDR S&P 500 Trust ETF's (NYSEARCA:SPY) 2.05%.

Year-to-date, the XLY has roughly tracked the SPY. Both have risen a few percentages.

Source: Google Finance

Amazon.com, Inc. (NASDAQ:AMZN)

Amazon has just been amazing. It has appreciated 11.5% year-to-date, outperforming the XLY and SPY. Trading at a P/E of about 216, some investors wouldn't touch it with a 10-foot pole.

That said, Amazon remains a strong disruptive force in retail, and its price follows its P/CFL much better than its P/E. If it continues that way, Amazon is likely to have more upside coming.

Amazon fundamental analysis graph Click to enlarge

That said, Amazon is overbought in the near term. So, interested investors should try to see if they can buy it on dips to $630-$680 or lower.

Home Depot, Inc. (NYSE:HD)

Home Depot fundamental analysis graph Click to enlarge

Home Depot trades at about 23.3x earnings, but consensus analyst estimates its earnings per share [EPS] to grow at a rate of 14.6%, which supports a higher multiple. So, Home Depot can be viewed as fully-valued, rather than overvalued at the current level. I think a more concerning metric is its Debt/Cap of 76%.

Investors who really want to buy Home Depot shares should see if the shares will pull back about 9% to a P/E of 21 (at about $123 per share).

Comcast Corporation (NASDAQ:CMCSA)

Comcast looks fully valued at 19.8x earnings. Consensus analyst estimates its EPS to grow at a rate of 12%. If it pulls back about 14% to 16.5x earnings at about $59, it'll be a fairer buy.

Walt Disney Company (NYSE:DIS)

Disney is reasonably valued at 17.5x earnings. Consensus analyst estimates its EPS to grow at a rate of 11.1%. If it dips 6-14% to $86 to $94 (about 15x to 16.2x earnings), it'd be an even better value.

McDonald's Corporation (NYSE:MCD)

McDonald Click to enlarge

McDonald's might look overvalued, but consensus analyst estimates its EPS to grow at a rate of 10%, which is much better than the slow to negative growth it experienced since 2012. So, arguably, McDonald's can be considered fairly valued today.

Starbucks Corporation (NASDAQ:SBUX)

Starbucks fundamental analysis graph Click to enlarge

Most of the time Starbucks is expensive, but it keeps going up. Recent history would indicate that it's a buy after it hits a high, dips and trades sideways for awhile. Could sideways action be coming up? Only time will tell.

Consensus analyst estimates have its EPS growing at a rate of 18.7%. The concern is if Starbucks's earnings growth slows down, and eventually it will, it will likely experience a multiple contraction.

Nike Inc. (NYSE:NKE)

Nike is another high-growth company that tends to be expensive in recent history. It currently trades at 26x earnings. Consensus analyst estimates have its EPS growing at a rate of 14.4%.

Like Starbucks, if Nike's earnings growth slows down, it will likely experience a multiple contraction.

Lowe's Companies, Inc. (NYSE:LOW)

Like its peer, Home Depot, Lowe's trades near its 52-week high. Lowe trades at 22.8x earnings, but consensus analyst estimates its EPS to grow at a rate of 15.8%, which supports a higher multiple.

So, Lowe's is fairly-valued. Its Debt/Cap of 63% is also lower than Home Depot's.

Investors who really want to buy Lowe's shares should see if the shares will pull back about 10% to a P/E of 20 (at about $74 per share).

Priceline Group Inc. (NASDAQ:PCLN)

Priceline fundamental analysis graph Click to enlarge

Priceline might look scary having a share price of over $1,000. However, it only trades at 21.1x earnings, while consensus analyst estimates its EPS to grow at a rate of 16.1%.

That said, buying it at 18x earnings or lower will give you a greater margin of safety. That translates to about $1130.

Time Warner Inc. (NYSE:TWX)

Time Warner is a better value than Disney as the former trades at 15.3x earnings, while consensus analyst estimates its EPS to grow at a higher rate of 12.9%.

Summary & Conclusion

The Consumer Discretionary sector appreciated a few percentages year-to-date, which is more or less in line with the market.

From the top 10 companies in the sector, the better values are Time Warner and Disney.

Most other companies such as Home Depot, Lowe's, Starbucks, Nike and Priceline tend to trade at high multiples with high expected growth rates. Investors should look for dips or sideways action for better entry points.

Then, there's Amazon whose earnings have a long way to catch up to its stock price, but aligns much better with its P/CFL metric.

Up next

I'm going to discuss the sectors of Healthcare and Financials in future articles. Maybe I'll also get into Consumer Staples, REITs and Industrials.

Share your thoughts in the comments below

  • Which sectors/companies are you buying today?

  • Which sectors/companies are you avoiding from buying today?

  • Are you selling any shares from any sectors/companies due to overvaluation?

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Disclaimer: This article consists of my opinions and is for educational purposes only. Please do your own research and due diligence and consult a financial advisor and or tax professional if necessary before making any investment decisions.

Disclosure: I am/we are long AAPL, FB, NKE, SBUX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.