Ask the Rational Investor: Value in Today’s Markets
Over the last 12 months, the stock market has continued to defy investors' expectations. Much of the rise in global equity prices can be attributed to unprecedented global monetary and fiscal stimulus.
Year-to-date, the S&P 500 has appreciated around 18-19%. As stock pickers, we think it is better to buy and sell individual stock positions based on fundamentals than trying to time the market.
It’s more challenging to find high-quality companies trading at attractive valuations. One area of value in today’s stock market exists in growing dividends. Stable and safe dividend yields are attractive compared to the broad stock market and fixed-income alternatives.
The S&P 500 currently trades at 23x 2021’s earnings estimates—representing an elevated valuation compared to past market valuations (ex. 15xs earnings). The current dividend yield is close to 1.3%. These valuation metrics, as well as specific company and competitor metrics, are useful when determining a company’s value.
A high-quality company worthy of consideration in your portfolio is Johnson & Johnson; famous for consumer brands such as Tylenol, Listerine, and Neutrogena, but also well known in pharmaceutical and medical devices.
Johnson & Johnson represents a stable business with 59 years of consecutive dividend increases and 70% of sales being attributable to #1 or #2 global market share. These competitive niches with market-leading shares result in above-average free cash flow generation.
Johnson and Johnson’s valuation is cheap compared to the broad stock market and offers a much higher dividend yield.
Litigation claims are a cloud over the stock in the near term, but some progress has been made in the last several weeks that suggests the worst may be behind them.
Over the next twelve months, it seems likely that most of the litigation issues will be resolved and continued positive operating trends will likely result in appreciation for equity shareholders.
Sources: Factset and company reports
Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms. The company serves high-net-worth individuals, families, and non-profits, and has been ranked as one of the largest money managers in Northeast Ohio.
Past performance is not indicative of future results. The material above has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed, Beese Fulmer Private Wealth Management ("Beese Fulmer") makes no representation or warranty as to the accuracy or completeness of the information, which should not be used as the basis of any investment decision. Information contained on third-party websites that Beese Fulmer may link to is not reviewed in their entirety for accuracy and Beese Fulmer assumes no liability for the information contained on these websites. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Beese Fulmer. For more information about Beese Fulmer, including our Form ADV brochures, please visit https://adviserinfo.sec.gov and search for our firm name.
