A couple of weeks ago, my online stock broker was offering free trades for stocks listed on the Dow Jones Index. As a frugal investor who is savvy with costs, I decided to dip my toe into the US market and buy an ownership stake in some of the best companies in the world.
Although the Dow Jones has 30 great companies, I only bought shares in Coca Cola, Visa, Cisco, Exxon Mobil, Intel, Nike and Procter & Gamble. I feel that these are the only companies at present in the Dow that are trading at reasonable valuations. In this post, I concentrate on my purchases on the latter five companies mentioned.
In total, I invested £1005.35 in Nike, P&G, Cisco, ExxonMobil and Intel. The expected total dividend from these purchases is £25.
Nike (NKE) Stock Analysis
At the time of purchase, Nike was trading at $50 a share giving it a P/E ratio of 23. Most people would bulk at a P/E ratio above 20 and thus would automatically give a stock like Nike a miss. But Nike is one of those rare companies that is cheap even with a high P/E ratio of 23. Nike has traded at a P/E close to 30 for most of its history and there are good reasons for this.
Nike has been growing at 13% annually for the past five years, 14% for the past 10 years and over 18% for the past 20 years. It is an absolute beast in the apparel industry with high customer retention due to its brand name. Even though they are currently fears surrounding new intense competition from Adidas and Under Armour, I will go out on a limb and say that Nike will grow at a pace of 14% over the next 5 years.
If you look at the data on Nike, you can see that its online stories absolutely exploding with year on year growth of 49%. The online store is only a tenth of the business but the growth rate is extremely high. The roll-out of Nike stores mixed with a burgeoning online presence will continue to fuel the growth of this sportswear giant and will reward shareholders handsomely going forward.
Nike is one of those stocks you can sit back and watch grow for the rest of your life. There are not many fashion/apparel companies you can say that about. I really love companies where ultimate passivity is rewarded. With great companies, you never want to hit the sell button. I know this sounds ridiculous but if warren Buffet held on to his $10 million stock purchase of Disney in 1966, it would be worth $12 billion today! Buy and hold with extreme compounders is very underrated.
Procter and Gamble (PG) analysis.
PG is in a sector I like. It makes low ticket items that people have to keep buying. This means its customer base is never ending, unlike a furniture maker where once a customer buys a piece of furniture, that’s it.
Branded consumer staple companies like PG have more meaningful brand equity. The difference between a 10% saving on a pack of washing up liquid and a large ticket item is substantial. Most people will stick with Fairy rather than risk it on a bottle of no-name dishwashing liquid to save 10p; those same people will seriously consider an alternative offering before paying a 10% premium on a TV, airline ticket or car.
With brands such as Pampers, Gillette, Olay and Bold under its portfolio, PG can charge a higher price that a non-branded product yet still outsell that product. Pricing power is supreme and PG is King.
Cisco (CSCO) Analysis
Imagine this. A country was about to go on an infrastructure binge and you could purchase shares in a company that would construct all the motorways, own the cement producing facilities, own the cops that would patrol the highways, and then get to stick a toll on every highway and collect all the revenues from the tickets paid by people using the highway. This would be a pretty intriguing business that would earn super-sized profits. Cisco is the internet version of this.
Cisco is the highway of the internet. It owns the infrastructure that keeps the world connected. Whenever you use the internet, a Cisco product is being used somewhere in the background.
As the first mover into the internet infrastructure space, Cisco has carved out a very lucrative advantage for itself. Whilst Cisco is undoubtedly a mega-corp today, it is still growing at a healthy rate for an organisation of its size.
Over the past 5 years, revenues have grown 7% per annum and over the same period, earnings per share have grown 11%. If Cisco had initiated a dividend before 2011, I am sure this blue chip company would be in the portfolio of many more income investors.
Cisco has a bullet proof balance sheet and has a net cash position of over $36 billion. This means that for every share, there is $7 in cash. Considering my purchase price of $29.80 and backing out the $7 in cash, it means that I am buying cisco for $22.90. When you look at it this was, the stock really does begin to look cheap.
ExxonMobil (XOM) Analysis
ExxonMobil is a wealth compounding machine. Since 1977, XOM has raised its dividend by 7.47% annually. But that’s only half the story. Add in stock price appreciation and Exxon shareholders have had an annualised return of 13.12% over this period. If returns like this don’t excite you, I don’t know what ever will.
Together with Royal Dutch Shell (RDSB), Exxon is at the top of the integrated oil pyramid. But unlike RDSB, I don’t think Exxon ever becomes cheap. All through the current oil downturn, Exxon hasn’t got as cheap as other oil companies. Part of the reason is its strong balance sheet. But the other past is that XOM stock is constantly supported by its huge exposure to index funds and the amount of existing investors that use the dividend reinvestment programme for the stock. In any given month, XOM is always one of the most bought stocks in the world and this stabilises its price and creates a floor of sorts. This is also one of the resins why I don’t like index funds; the passive investors buy into companies without understanding the fundamentals thus vastly over pay for the highest weighted stocks.
In terms of mu purchase, I bought 3 shares at $83 each.
Intel (INTC) analysis
Intel is currently the dominant player in the PC chip market. Although it missed the mobile and tablet boat for which it was rightly berated, it is good to see that it is starting to expand its horizons and get into the communications and consumer electronics segments via its purchase of Altera.
I bought 5 shares of Intel at $33.7 a piece. Total expenditure on this was £143.
£143 in a stock might be small but do not despise the day of small beginnings. A long enough stretch and a high enough compounding rate can turn paltry sums into four figure payouts.
Are US stocks Overvalued?
I am always surprised by statements like ‘the stock market has a historical average P/E of 16 so the stock market is overvalued by 40% at a P/E of 23.’
How can you compare 16x P/E without discussing interest rates. So if you think that stocks should trade at 16x P/E today, than you should also think that interest rates should be much higher than they are now. (I am currently writing an article on bond proxies so check back over the next month to get a better insight into this)
I personally think that interest rates need to be higher. But hey, what do I know. Central bank governors and their teams are far smarter than me and it is up to them to decide these things.
Why I’m investing even though markets are at an all time high.
Part of the reason to keep investing even though the market is at an all time high is down to psychological biases. Human nature being what it is, most of us, even if we get out before a market tumble, fail to get back in again before the market has moved on higher. That’s why it is important to remember that stock market investments should be for the longer term.
Calling short term market movements is a fools game. Instead, identify exceptional businesses and own them. The very best businesses grow through thick and thin.
That doesn’t mean that I am 100% fully invested right now. My portfolio still has a sizeable cash position but I do understand the concept of making money work for me. Time in the market definitely trumps timing the market. As Warren Buffet recently said, if interest rates stay at level they are today over the next four to five years, then stocks today are definitely cheap!