While Wednesday definitely got everyone to breathe easier on the QE front, sooner or later, Ben Bernanke is going to ease off the bond purchases the Fed has been making.
All these purchases have driven yields to near zero — and consequently, yield hunters plowed their money into the stock market to find the yields they once got from bonds. This is one reason for the inflation in the stock market, and why some really great companies have been selling at outrageous prices.
If you’ve followed my columns on finding additions for my 2013 retirement portfolio, or in examining some of the world-class brand names to add, you’ll know I often found them to be anywhere from 30% to 100% overvalued.
However, if QE comes to an end, these stocks might gradually fall back to reasonable levels as capital flows out of the stock market and back to bonds. When that happens, I want my finger on the trigger to make some purchases, because in theory, the stocks will have fallen because of this capital move, not because of fundamental company issues.
Here are my top considerations:
Whole Foods Market (WFM) is the poster child of the organic food movement. Its marketing message has been heard and gobbled up by the public. It has $1.35 billion in cash, essentially zero debt and amazing free cash flow. But it trades at 39 times earnings on 18% long term growth.
Costco (COST) is a fabulously managed business with $3.5 billion in cash and $1.5 billion in annual free cash flow. Oh yeah … it trades at 25 times earnings on 13% long-term growth.
Speaking of Costco, its Central and South American counterpart PriceSmart (PSMT) is playing right into the mega-growth that region is experiencing. And until the stock trades closer to its 20% long-term growth rate, instead of 33 times earnings, I’m not touching it.
MSC Industrial Direct Co. Inc. (MSM) is a boring company I wrote about earlier this year that is a marketer and distributor of a broad range of metalworking and maintenance, repair and operations (MRO) products. Machines always needs parts, and MSC has a lock on them. However, MSM has a long-term growth rate of 12% but trades at 19 times earnings.
You want something boring like machine parts? How about specialty chemicals? I wrote about Albemarle Corporation (ALB) awhile ago and would like to see this at fair value of $43, rather than $63.
I also know that brown can do a lot for me, if and when United Parcel Service (UPS) gets off its lofty perch of 18 times earnings and approaches its long-term growth rate of 11.4%. It’s basically got a stranglehold on package delivery with FedEx (FDX), and I want to be part of an oligopoly.
REITs are going to get killed as people abandon these dividend-payers for bonds, so I’m hoping to get Public Storage (PSA) at a cheaper price than 21 times earnings and a 7% growth rate. It’s the brand name in storage with a solid balance sheet.
Likewise, expect master limited partnerships to get hammered. What matter of MLP play to get into than one that’s been consistently raising dividends for years and years — namely, Kinder Morgan Partners LP (KMP)? I don’t like it here at 25 times earnings, but would love it at half that price.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.