Drugstore cowboys: CVS, Walgreen red hotNovember 5, 2013: 2:12 PM ET
The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.
With each passing day, it's getting harder to say with a straight face that stocks are fairly valued.
But even though some parts of the market are looking as frothy as the top of a Starbucks Eggnog Latte (three cheers for seasonal beverages!), it is interesting that many boring consumer companies with reasonable valuations are leading the charge higher.
Sure, many stocks at all-time highs are momentum plays.
You've got your casual restaurant chains Buffalo Wild Wings (BWLD) and Chipotle (CMG), as well 3D printing companies 3D Systems (DDD) and Stratasys (SSYS). Buffalo Wild Wings, aka B-Dub for you sports fans, is the cheapest stock of these four. And it trades at 32 times 2014 earnings forecasts!
Still, several stodgy firms are also hitting records. Take a look at CVS (CVS) and Walgreen (WAG). Is there anything more boring than a drugstore stock? But what CVS and Walgreen lack in sex appeal, they more than make up for with earnings growth, dividends and stock prices that aren't in the ionosphere.
CVS, which reported earnings that topped estimates Tuesday, rose more than 2% to a new peak. But it is trading at just 14 times 2014 earnings forecasts, in line with its projected earnings growth rate for the next few years. CVS also pays a dividend that yields 1.4%.
Rival Walgreen is hovering just below the all-time high it hit Monday. It's a bit pricier than CVS, trading at 17 times estimates for fiscal 2014. But it also offers a solid quarterly payout for more conservative investors. Its dividend yields 2.1%. Walgreen's shares have also done twice as well as CVS this year -- and CVS has hardly been a slouch!
Why are CVS and Walgreen doing so well? It could partially be an Obamacare play. More Americans with health insurance should lead to more demand for prescription drugs. That could be particularly good news for CVS, which owns pharmacy benefit management firm Caremark.
But both companies have also done a decent job of changing the makeup of their stores to focus more on the front end. Many drug stores are almost like mini-supermarkets or Wal-Marts.
Still, I think another force is at work here. For some investors, especially boomers on the verge of retirement, bonds are no longer the most attractive investments out there. Interest rates are low and returns are anemic.
So if you want a little more juice for your portfolio, why not buy a well-known brand-name stock that also offers the bond-like security of a dividend?
That may be a reason why other consumer-oriented companies are doing well too. V.F. Corp. (VFC), which owns The North Face, Timberland, Wrangler and Lee brands is at an all-time high. Shares trade for 18 times projected profits for 2014.
That's not dirt cheap. But it's less expensive than another apparel retailer, Michael Kors (KORS).
Kors-branded jeans may be more runway ready than Lee and Wrangler. But Kors, which hit a new record following strong earnings Tuesday, trades at nearly 30 times fiscal 2014 earnings estimates. And it doesn't pay a dividend. V.F. Corp., meanwhile, has a dividend that yields 1.9%.
There are a bunch of restaurant chains trading at all-time highs too. And they aren't as richly valued as B-Dub and Chipotle. Brinker International (EAT) hit a record on Tuesday. Shares of the Chili's owner are valued at 16.5 times fiscal 2014 earnings estimates. The stock pays a dividend that yields 2.2%.
Cracker Barrel (CBRL) and Cheesecake Factory (CAKE) are a little richer (in stock price but probably in calories too) than Brinker. But each trades around 20 times earnings estimates for their next fiscal year. And they also pay dividends.
So neither of them are as expensive as Chipotle, which trades at more than 40 times 2014 profit forecasts.
Still, the valuations on some of the most azure of blue chip stocks are finally beginning to look stretched. Nike (NKE) is at an all-time high. It pays a dividend. But it trades at 25 times next year's earnings estimates.
And remember how I said the overall market was as frothy as a Starbucks (SBUX) drink? The may now be true of Starbucks' stock as well. Shares hit a new record Tuesday.
Don't get me wrong. I love the company. I devoted an entire column recently to why I think Howard Schultz is the best CEO ever. But Starbucks now trades at more than 30 times fiscal 2014 earnings estimates. That seems a bit excessive.
So investors who are following the 'buy what you know' model of portfolio management need to be careful. You can't just keep chasing momentum forever.
We'll fill our mouths with cinnamon. Speaking of momentum, I joked on Twitter this week that one of the hottest stocks during the past few months is another boring company: aluminum producer Alcoa (AA). Shares of Alcoa are up more than 20% since the company was removed from the Dow in September.
That led me to a Name That Tune challenge on Twitter. Amazingly enough, there is a song that has the word aluminum in the lyric. (And it's not a metal band. Ha! Couldn't resist.)
Nice job, Dave. I love The Decemberists. (Mrs. Buzz and I saw lead singer Colin Meloy in a solo show Friday night!)
But this is sort of sad. It shows how old I am getting. I completely forgot I asked the same Name That Tune question for a Buzz column back in 2010. Oy. And I here I dreamt I was being original. (But not an architect.)