What To Do About Overvalued Stocks

By any historic measure Stocks are grossly overvalued. So should you be buying these defensive stocks? 

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Disclaimer:  This information is provided for educational purposes only, I am not a licensed financial advisor and you should make your decisions about buying or selling any of these stock suggestions or consult a licensed professional.

 

You may have notice that many investors like Warren Buffett are setting on huge piles of cash, waiting for the next market crash and then they will jump in and start buying the best companies at huge discounts.  They are of course missing one of the longest running bull markets in history.  Stocks by any measure (most commonly the price earnings ratio) are overvalued. The price-to-earnings ratio (or P/E ratio) tells investors what the market is willing to pay at a given moment for a stock based on its past or projected future earnings.  The current S&P500 10-year P/E Ratio is 37.5. This is 89% above the modern-era market average of 19.6.

Historically, a P/E ratio of 19 is considered to be about average. So stocks with a P/E below 19 are cheap. Those with a higher P/E are expensive.  The P/E ratio also varies by industry, so be sure and check that for any stock you might be interested in adding to your holdings. 

Stock market typically run in cycles with rising prices called a bull market. A bear market is when great companies see share prices falling, until they reach fair value or less.  This is when value investors start to buy up shares, because they know they are buying at a discount.

There is a way to protect your investment from the risk of a market correction, simply buy more defensive stocks. These stocks are companies that offer products that consumers will buy regardless of the state of the economy. These stocks tend to underperform during strong bull markets. Conversely, they tend to outperform the market during corrections.

I have identified six defensive stocks that you can buy to give your portfolio a hedge against a uncertain market. It’s never a bad time to start protecting the gains you’ve made. 

BEST BUY (NYSE:BBY)

 

Best Buy (NYSE: BBY) is another of the “cash cows” you can consider to offset a tapering announcement from the Federal Reserve.  Best Buy stock price is only up 18% for the year. And analysts suggest that the stock has another 8% to go with 75% of analysts saying that the stock is set to outperform.

Dividend history: Best Buy has paid a dividend for the last 16 year. Their current dividend yield is 2.62% with a payout ratio of 25%.

Financial Ratios

Current Price: as of Dec. 9, 2021: $103.95, with an intrinsic (or fair) value of $130.65.
 

Consensus Rating: Buy with 10 Buy Ratings, 5 Hold Ratings, 1 Sell Rating.
 

Consensus Price Target: Best Buy Co's Intrinsic Value is 129.93 (4.6% Downside)

About Best Buy

Best Buy has successful executed its digital and omni-channel strategy. Expect lower sales in 2021 but, the company raised its outlook for comparable sales to decline in the range of 0% to 3% from previous guidance that called for a decline closer to high single-digits. Best Buy Co, Inc sells consumer technology products and services in all 50 states, districts, and territories of the U.S., operating under several brand names.

Other similar stocks to consider: Apple for its capacity to sell from its retail stores and online.

 

MCDONALD’S (NYSE:MCD)

McDonald’s (NYSE: MCD) is a great stock to buy for a defensive portfolio as it has a presence almost everywhere and a strong history of financial performance. Over the past few years, the iconic fast-food chain was working to develop the digital side of its business. And that paid off in a big way during the pandemic. MCD stock soared as the company kept its drive-thru windows open with strong comparative revenues.

Dividend history: McDonald’s has increased in each of the last 45 years.  The company has a dividend yield of 2.13% and a payout ratio of 66.98%.

Financial Ratios

 

 

Current Price: $262.44

Consensus Rating: Buy with 25 Buy Ratings, 5 Hold Ratings, 0 Sell Ratings.

Consensus Price Target; $267.55 (6.2% Upside). The Intrinsic Value 144.15 USD. MCD stock is currently overvalued.

The stock has moved to a record high since the company reported earnings in July.  The company has increased employee pay to $17 an hour.  While this may act as drag on earnings, this should help attract the workers needed to service customers. 

 

About McDonald's

McDonald's Corp. engages in the operation and franchising of restaurants. It operates through the following segments: U.S.; International Operated Markets, and International Developmental Licensed Markets and Corporate.

 

Similar stocks to McDonalds fast food industry Starbucks (Nasdaq: SBUX), Chipotle Mexican Grill (NYSE: CMG), Restaurant Brands International (NYSE: QSR), Domino's Pizza (NYSE: DPZ)

 

UNITEDHEALTH GROUP (NYSE:UNH)

Health care stocks are generally good defensive stocks and for this sector you might want to look at UnitedHealth Group.

During the pandemic, health insurance stocks dropped and higher costs have hurt UnitedHealth’s profits. But for 2021, UNH stock is up about 18% which is slightly outpacing the S&P 500 Index.

Dividend History: UnitedHealth Group began paying annual dividends in 1990, and moved to a quarterly dividend in June 2010. A dividend of 1.4% is not that impressive, but it currently outpaces a 10-year Treasury note.

Financial Ratios

 

 

Current Price: $478.23

Consensus Rating: Buy 21 with Buy Ratings, 1 Hold Ratings, 0 Sell Ratings.

Consensus Price Target:  $477.36 (8.5% Upside)  The Intrinsic Value of UNH 434.16 USD. UNH stock is  currently overvalued.

About UNITEDHEALTH GROUP

UnitedHealth Group, Inc provides health care coverage, software, and data consultancy services. The UnitedHealthcare segment helps coordinate patient care, improve affordability of medical care, analyze cost trends, manage pharmacy benefits, work with care providers more effectively, and create a simpler consumer experience.

 

GENERAL MILLS (NYSE:GIS)

  

Consumer staples companies like General Mills, Kellogg, and Colgate make strong defensive stocks. And General Mills is one of the best-in-class among consumer staples companies. The company is perhaps best known for its cereal brands including Cheerios.

A similar great choice is Kellogg, as they recover from a recent labor strike by workers. 

The company has expanded into convenience foods with its purchase of Blue Buffalo Pet Products. The $8 billion acquisition gives the company a foothold in one of the strongest growth drivers for the next decade.

 

The company has continued to post strong revenue and earnings at a time when many investors were concerned that revenue would decline. The share price has essentially doubled in 2021.  Stock analysts are projecting a 10% gain in the stock over the next 12 months. 

 

Dividend History: General Mills has raised the dividend in nine of the last 10 years and has what is considered one of the safest dividends in the industry. Dividend Yield is 3.18%. The Dividend payout is 54.95%.

Financial Ratios

Current Price: $62.04

Consensus Rating: Hold with 2 Buy Ratings, 3 Hold Ratings, 1 Sell Ratings.

Consensus Price Target $61.50 (0.9% Downside).  The Intrinsic Value  51.97 USD. GIS stock is currently overvalued.

 

About General  Mills

General Mills, Inc engages in the manufacture and marketing of branded consumer foods sold through retail stores. The North America Retail segment includes grocery stores, mass merchandisers, membership stores, natural food chains, drug, dollar and discount chains and e-commerce grocery providers.

Similar stocks to consider:  Lancaster Colony, Post Holdings.

COCA-COLA (NYSE:KO)

 

 

 

If you have a favorite defensive stock, should it be Coca-Cola (NYSE: KO) or Pepsi (NASDAQ: PEP)?

In 1994, Buffett bought more shares of Coca-Cola and at present holds 400 million shares in the company. 

You can of course make a strong case for PEP stock. However, the company is currently the target of a class-action lawsuit regarding working conditions at one of its plants. 

Coca-Cola is still a great stock to buy if you are thinking of building a defensive portfolio.  If the company’s recent earnings report is any indication, Coca-Cola will be just fine, as it continues to expand into other beverage products including Bodyarmor for $5.6 billion.

Share prices are up 16% in the last 12 months. However, investors (such as Warren Buffett) invest in Coke, in large part, for its dividend. Coca-Cola is a true Dividend King and Aristocrat. A Dividend King is a company that has increased it dividend annually for at least 50 years. Aristocrat is a company that has paid and raised its dividend for at least 25 consecutive years.

Dividend History: Coca-Cola has actually raised its payout for the past 59 years in a row. Their current dividend yield is 3.06% with a payout ratio of 81.71%.

Financial Ratios

Current Price: $55.84

Consensus Rating: Buy with 10 Buy Ratings, 5 Hold Ratings, 0 Sell Ratings.

Consensus Price Target: The Intrinsic Value is 53.47 USD. Compared to the current price, KO stock is Overvalued.

 

About Coca-Cola 

The Coca-Cola Co is a beverage company, engaged in the manufacture, market, and sale of beverages which include sparkling soft drinks, water, enhanced water and sports drinks, juice, dairy and plant-based beverages, tea and coffee and energy drinks.

GENERAL ELECTRIC (NYSE:GE)

When you look for a defensive stock you should make sure they are cash-generating machines.

That wasn’t a statement that would have been attributed to General Electric (NYSE: GE) in recent years. But with the hiring of Larry Culp as the company’s CEO, the company is prioritizing cash flow.  GE preserved $3 billion of cash as it weathered the pandemic.

However, cash preservation wasn’t the company's only goal. For many years, General Electric had run far afield in terms of its core businesses. Culp has helped streamline the company’s operations. And while its largest business is power turbines, it’s also involved in the health care sector. And that’s why the company is making this list.

GE stock is up over 80% in the last 12 months and is still going strong in 2021. The stock is up 21% for the year, outpacing the S&P 500 index over the same period.

Financial Ratios

 

Current Price: $97.05

Consensus Rating: Buy with 10 Buy Ratings, 7 Hold Ratings, 0 Sell Ratings.

Consensus Price Target: The Intrinsic Value is 98.64 USD. GE stock is at fair value.

 

About General Electric  

General Electric Co provides technology and financial services to a global market and operates the following business lines: Power, Renewable Energy, Aviation, Healthcare, and Capital. GE was founded by Thomas Edison and was incorporated in 1892.

Each of these stocks represents a quality company that you could own at any time, but they are especially attractive if you are concerned about a market correction or buying stocks that are overvalued.

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