April 29, 2012
I have 38 different large cap stocks that I follow and use as bellweathers. I normally just look at them on a technical basis to get an idea of the strength of the market but somehow when I was looking through the list today I noticed something very interesting when looking at the fundamentals.
Of the 38 bellweather stocks that I follow guess which ones have the highest P/E ratios? BIDU, AMZN, MCD and KO. Okay, I understand why BIDU is trading at 29x projected EPS estimates for FY2012 as they are growing at a very nice clip. AMZN? Don’t get me started on that one. It is trading at about 177x projected EPS for FY2012 and over 60x projected EPS for FY2012. I don’t get it and I never will. Now come the surprises. McDonalds is currently trading at 17x FY2012 EPS estimates and Coke is trading at 19x FY2012 EPS estimates. They are both only growing earnings at 10% annually and pay dividends of less than 3%. Go figure. On the other hand, companies growing much faster such as AAPL and GOOG are much cheaper. AAPL is trading at less than 13x the consensus estimates for their FY ending on 9/30/2012 and GOOG is currently trading at only 14x their FY2012 estimates. This makes no sense to me at all. I can understand why people may be a bit skeptical of AAPL’s ability to continue their torrid growth rates considering that 51% of all American households now have at least one AAPL product under their roof but for the life of me I can’t figure out why mature companies like KO and MCD are trading at P/E’s of 17-19.
Conclusion here: I wouldn’t touch MCD or KO with a 10 foot pole. Way overpriced given their respective growth rates but the dividends should help cushion any downside.