Valuations are so high it's nerve-wracking

The only truly inexpensive areas are tech, industrial and finance -- and they all remain despised.

By Jim Cramer Apr 29, 2013 9:03AM

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Stock market © CorbisHere's the current twinned narrative.


We should be worried about international companies if they have big exposure to Europe, because they will have shortfalls and slower revenue growth and are inherently risky. Or we should be worried about domestic growth stocks because they are overvalued and are therefore intrinsically risky.


You know this. I know it. It's the dialogue. No one comes on air or writes in these cyber pages that there's little earnings risk in PPG (PPG) or Alcoa (AA) because of Europe. No one says, "Right now I don't have to think about Europe or Procter & Gamble (PG) because things will be fine." That's simply not happening. Everyone is worried. In fact, we will accord it to a company like Kimberly Clark (KMB), which pulled out of the Western and Central European diaper market because it had had enough with the lack of profit or growth in what is basically a low-birthrate, totally cutthroat market.


No one is getting a free pass for Europe, so the idea that we should be worried about it is absurd. We are worried about it.


Similarly, do you know anyone who is saying that General Mills (GIS) is a "table-pounding buy" at 18 times earnings? Or that you have to get into Wal-Mart (WMT) at 15 times earnings, or that Coca-Cola (KO) is a "steal" at 19 times earnings? The only steal in this market is what Warren Buffett and his Berkshire-Hathaway (BRK.A/BRK.B) got with Heinz (HNZ). He's paying only 1 to 2 multiple points above the price-to-earnings multiples of General Mills and Coca-Cola for the whole company.


I am not even going to go there with Verizon (VZ). Without a transaction that would accelerate its growth rate via ownership of all of Verizon Wireless -- at a price that wouldn't ruin its balance sheet -- I think you are taking a lot of price risk to pick up that 3.84% dividend yield. That's especially so after AT&T (T) has shown how things can go wrong and a stock can be knocked back on a subpar wireline quarter.

These stocks are expensive. All of safety is expensive when you consider, say, a stock like American Electric Power (AEP), with its anemic growth -- a five-year average of 3% and change. You do get a 3.88% yield with that name but, again, why couldn't that go to 5% on any sign that rates will back up?


It shouldn't be lost on anyone, either, that the ultimate in domestic-security stocks -- the homebuilders -- are trading at as high as 26 times earnings. No one has said they are cheap at all, even though the market had been willing to bid up D.R. Horton (DHI) by $2 after its excellent report Friday. Homebuilders, the ultimate in cyclical stocks, trading like growth stocks? Give me a break.


The issue for me is that I can make a case about worrying over every stock. I can say that everything is overvalued and that you should own nothing. In fact, the only areas that are truly undervalued are tech, industrial and finance, and they are every bit as despised after this earnings period as they had been before it. They are the only stocks not worth worrying about on valuation -- and, at the same time, they are the killers of performance, as any owner of these names would know.


So we either buy expensive stocks or we lose money. All of the wags who say we shouldn't buy the expensive stocks don't seem to mind losing money or falling behind the averages -- because that's precisely what is happening if you own Caterpillar (CAT) or Dow Chemical (DOW) or U.S. Bancorp (USB) and Capital One (COF) or Avnet (AVT) or Apple (AAPL). In every one of these groups, I can pick some winners that have beaten the averages, but they are the diciest even as they are the cheapest.


So you can worry about the winners. But I am licking my wounds for owning many losers that are cheap for my Action Alerts PLUS charitable trust. As for the expensive ones? Even after this earnings period they remain the biggest winners, even despite all the hand-wringing and warnings from those who have definitely never bought a stock or who don't care one whit about performance.

cramer

 

 

Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust and is long AAPL.

 

 

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49Comments
Apr 29, 2013 10:16AM
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We should have already been negotiating to restore our workforces. The 5-year gap has spoiled lots of needful skill sets. The administrative doofuses at the top make too many assumptions, rely too much on spreadsheets and purchased data. The sheer cost of restoring what was irresponsibly exported to nations who did not reciprocate or embrace balanced globalization will be staggering. There isn't any other way to do it... your stock purchases and holdings will evaporate in those costs while the Glass Ceiling crowd has theirs carefully hidden offshore. A reminder that the same people who forced us to print QE hold the contracts and derivatives on that worthlessness. As we restore American vitality they stand to make killings off their own foul doings. You decide America, I think they should be writing the checks to cover those costs now, rather than US later.
Apr 29, 2013 11:29AM
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Cramer uses hundreds of words to say simple things. He talks so fast and slurs the words so much  that I had to stop watching his show....I just can't understand what he is trying to say !   Not much different here.  I think he is saying the cheap stuff will get cheaper, the expensive stuff is too expensive, but they are the winners.

Let me get an aspirin and digest this. Ok, it seems to me the best move is to gather up cash and wait.  I always make money when the whole market (and my fav stock) is down. I always loose when I buy in a high market, like now.  Talk all they want, the market usually drops big in May / June for any of a hundred reasons. Who cares ?  Pick your stock, wait for the drop and buy low.   Then, wait again and when the stock goes up....sell !   Impatience is expensive.

Apr 29, 2013 9:23AM
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Summary of this article in 2 lines:

You usually get what you pay for, and something of higher quality usually costs more.  The same principle applies to stocks.
Apr 29, 2013 9:45AM
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i work for a company with exposure in england and belgium.  what's happening is we are tearing down the sister companies in those 2 countries.  the claim is "we" are stronger overall in usa than anywhere else in the world.  for perhaps another 5 to 7 years?  so that work is being brought here. 

 

so to me companies with exposure will collectively see to it that europe DOES crash and burn

 

 

Apr 29, 2013 12:40PM
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Low interest rates have encouraged people to assume more risk in their investments....

 

...while hoping to be sufficiently nimble to get out of the way when thing turn sour.

 

The run up in stocks is largely an illusion but there are few other places to go to protect capital?

 

If you are not a concerned investor then you are simply not paying attention.

 

 

Apr 29, 2013 2:04PM
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One of these days....

I'll probably see FATTY CAKES....Broken down along the road, with his 30 year old Pick-up.

I know how to recognize him...

Mr. Brucey will be out jacking up the truck to fix a tire or under the hood..

Fatty Cakes will be standing around yelling, with a Whip or a Cat-of-Nine Tails.(cough,cough)...

 

You don't want to be standing out in the road Fatty...As I SPEED up and DRIVE-BY..

Otherwise we shall have to rename you, as PANCAKES...

yuk,yuk,yuk...

Apr 29, 2013 11:47AM
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NTU and V_L.....I have a tendancy to agree with your assumptions..

It is very obvious in many Sectors of our Society and somewhat disturbing..

 

Even people that are working, feel somewhat entitled to a multitude of particular Benefits...IMO

Some that come to mind, Flex-Time, Home based, performing their duties away from the jobsite.

Higher wages if educated in a non-productive field, the list goes/can go on...

 

40-50 years ago.....We were expected to show up at work AND WORK...No encumderances from our homes, no personal calls all day long on a device...

AND NO "PERSONAL" USE OF THE COMPANIES WEBSITES AND PCs..

Of course the LATTER part and practices came in a few years later.

Apr 29, 2013 1:04PM
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Inflation, Still high unemplyment, devaluation of dollar currency, quality of products hitting rock bottom, banks and big financial institutions running the stock market instead of loaning the money to businesses to build up economy, passive paybacks in shape of lobbist contributions, US Government and not US businesses in massive debt, uncontrolled spending by US government to support businesses and banks, massive and bloated support or entitlement spending, Social security pyramid almost at collapse due to its inverted state, Medicare Medicaid expense increase yeaer over year, off shoring by businesses for hight tech jobs and now financial sector job as well, manufacturing reduction year over year, high illegal immigration, Negative population growth if you dont consider legal immigration leading to many empty towns, wars and terrorism across the world. If anyone thinks this is market boom then think again. We have to go on a war like emergency footing to fight all these fronts parallely and take some extreme measure to counter the loss that has laready been done. Nothing short will improve situation. Even with extreme measures it will be 10 years before improvement starts. What we are seeing at the moment is with world economy down, people are finding percieved safety in Dollar, nothing more. The big banks and trading super computers profit from common mans contribution to the stock in form of 401k or trading. They want more players in the market and are increasing the stock indexes enought o lure in people before they make them plunge and make benefit. They know how to benefit in growing as well as falling market because they control the direction.
Apr 29, 2013 2:45PM
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Hey Jim,  This is your market.  With over $2.0 billion pulled out of emerging market funds last week, even more coming from Europe and Japan printing money like crazy, you have to expect it to all come to the last stable marketplace.  People are investing in government bonds which loose 3% after a correction for inflation?  Things have to be worse elsewhere to accept that kind of guaranteed loss. This has got to be the best run up since Hong Kong was handed over to the Chinese.  It's a no brainier until either someone does something stupid or we get a more stable economy someplace else in the world.  But then again, this bubble could burst quicker than it takes a congressman to print press release.
Apr 29, 2013 2:02PM
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And yet the average P/E of the S&P 500 is less than the historical market average.
Apr 29, 2013 1:38PM
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I feel like I just heard a weather report on television stating that the weather may be either good or bad, but there will be some weather.  Jim, this article was more like the random musings of an amateur investor rather than an experienced one. 

 

Buying quality industrial stocks of companies that will survive an extended recession is a solid recipie for long-term success.  Buying index based ETFs and broader sector ETFs when you cannot find a deal among the individual companies you follow is another alternative.  Why are these two options being ignored? 

Apr 29, 2013 1:59PM
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"Similarly, do you know anyone who is saying that General Mills () is a "table-pounding buy" at 18 times earnings?"

I'm not saying it's table poundiing, but I love this stock and recently signed up to make automatic monthly purchases through it DRIP (no fees for purchases or reinvested dividends).
The stocks had an average eps growth rate of almost 10% per year for the past 5 years and pays a 3+% dividend.  That makes a P/E of 18 reasonable.

What makes it a good buy is that is that there have been steady increases in earnings, revenue, and dividend growth for well over a decade.  And I don't mean with a blip in 2008-9: General Mills kept increasing those three things right through the crash.

When the market fell 45% from 2008 to March, 2009, GIS did fall 33%.  But it established a new all-time high on December 21, 2009.  The stock price has an extremely stable beta of 0.03.

Additionally, it's Return On Equity is stronger over the last few years than it was in the early 2000's, indicating it's excellent at putting new earnings to work.  It's Long Term Debt/Equity is about half what it was in 2007.

This stock passes EVERY test in Mary Buffett's "Buffettology."
Apr 29, 2013 1:58PM
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You can be bearish on the overall Market and still be bullish on a small group of stocks. The one index that I measure against Market rises and falls is trading at TWICE the normal valuations. Clearly due to Massive Global Money Printing. There is no such thing as cheap when Global Governments are bankrupt. There is no such thing as cheap when Global and Personal Debt are setting records.

But Uncle Ben says everything is fine.

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No kinding Cramer stock prices are in a huge bubble here.

 

Stocks should be at most 10 times earnings or you are in dangerous waters way way over your head.

 

You can thank Bernanke and the pumping of over $4 trillion dollars into the equity markets for the over priced stocks.

 

Add in the fact that 10,000,000 retired people a year are taking $30,000 to $200,000 out of the stock market a year (the $200,000 are firefighters and high government workers in California and other states if you were curious they only put into their profit plans enough money for $20,000 a year to be taken out). And are being replace by 1/2 of a worker making minimum wage at 29 hours a week or $11,000 a year with no contributions to a 401K plan remember the 10,000,000 retired folks a year use to pour in $5K to $10K a year.

 

Pretty much the stock market 401K pension plan ponzi scheme has already blown up and only trillions of dollars from the Federal Reserve is keeping it afloat.

 

Later this year when the whole world moves from trading in US dollars to Chinese RMB (already Apec which is half the World GDP is trading in Chinese RMB and not the dollar) because of the dollar's decline in value each and every day, the US stock market and debt market (read US T-bills and state and local government bonds) will collapse. Bernanke is just making that day happen sooner rather than later.

 

It seems with all this negative outlook for stocks going forward -- loss of profits and revenue as the US , Europe and Japan sink into a greater depression, withdrawal of trillions of dollars of retired workers and no new money coming in from new minimum wage earners. A DOW of 3,000 in a couple of years is bound to happen.

 

We are at the end times of the western economic cycle which has had a good run for over 700 years but is now on it's way out.

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The only thing backing the US dollar right now is the US military and Obama is fast getting rid of the military.

 

1) Reduce nuclear bombs to a mere 300.

2) Do not build any new warships expect these way over priced Littorships which are merely coast guard quality ships.

3) No Plans to build any new aircraft carriers or Submarines

4) reduced the F-22 jet fighter buys to about 200

5) reduced the F-35 joint strike fighter buys to about 700

6) reduced military man power to about 500,000 soldiers

7) and countless other measures that will make our military weaker than China's

8) soon even Russia's military will be twice ours.

9) increase the graft and spending on the military to keep pace with inflation while gutting the military. Of course the military contractors who are left are loving getting paid for not building anything. Pure 100 percent profit except the couple of thosuands of dollars in employee salaries needed to push the money from Congress into their executive bank accounts.

Apr 29, 2013 11:41AM
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Careful there, Cramer. On your recommendation I bought Alcoa, Motricity, Gold, Ford and in 2011 Deckers.  Lost my tail on all of them !  The last 18 months have been just "getting back to even" !  Did it, but not your way !
Apr 29, 2013 11:21AM
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"But I am licking my wounds for owning many losers that are cheap for my charitable trust. "

Why don't you tell anyone which charities received donations from you trust ?
Apr 29, 2013 1:39PM
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Agreed, I can not follow Cramers satire.  Is he for something or against something?  Is he saying stay away from the expensive stuff, or is he saying play the momentum game with the expensive stuff.  I find myself using my logic and saying " he must be saying this".  But is that me saying it or Cramer?  I am usually pretty able to read between the lines and satire, but this is the second article of Cramers I just throw up my hands.
Apr 29, 2013 2:55PM
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  Buying off the new highs list can work well in up trending market. Strong stocks tend to get stronger. But at some point, follow Cramers advice take some money off the table, or buy some protection in the form of puts or bear ETF's  That time may be upon us.. Buying off the new lows list can work as well if you can pick the next turn around play. This can be tough, i can't seem to do it. I'm thankful for some of the various opinions on this site. After all thats what makes a market. I'm fairly new to the site and haven't figured out if the name calling is real or you guy's are just spoofing each other. If real, there's some real bitter people here. Those accused of being far right like All Bull S seem like skin heads rather than true right. Those accused of being far left, on the order of Obama's buddy Van Jones who advocates rioting in the steets to gain power,  seem a little out of it. Enough said for now. Good investing!
Apr 29, 2013 10:49AM
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We started the day on the upside, most news have been decent, the question here is will we be able to sustain....Its monday, a down day as of late and we have scumbags here waiting to make their move so...Lets be cautiously optimistic....Still very early, over 5 hours to go...We will see...More later.
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