Q&A Time: Costco, Ralcorp, Railroads and Bank of Nova Scotia

Question

What is your outlook on Costco right now? I like its momentum, but it’s also near its 52-week high. If it’s not worth buying today, what should I let it drop to before I do buy?

Answer:

While we shop at Costco Wholesale Corp. (NASDAQ: COST) stores frequently, we find the stock rather expensive. The stock is trading at 26 times earnings, and has a price/earnings to growth (PEG) ratio  of 1.79. We prefer to buy stocks with a PEG ratio below 1 or their industry average. When other stores were reporting same store sales were down, Costco was reporting same store sales were up 7%. If you are looking for a holding in the retail space, we think Target Corp. (NYSE: TGT) looks good right now.

Question:

I got into Ralcorp Holdings in 2011, and it has relatively bounced back from its lull midyear. Is this worth holding on to?

Answer:

Ralcorp Holdings (NYSE: RAH) a manufacturer, distributor and marketer of private brand foods, and value-branded food products in grocery stores. ConAgra Foods Inc. (NYSE: CAG)  agreed to buy Ralcorp for about $5 billion in cash. This deal should create one of the largest packaged food companies in North America, with annual sales of approximately $18 billion. ConAgra is paying $90 a share for Ralcorp—a 28% premium to Ralcorp’s Monday closing price.

We recommend that now is the time to sell. Ralcorp rejected several bids from ConAgra last year. The company has been under pressure to sell itself from one of its main shareholders, a hedge fund headed by a former lieutenant of billionaire activist Carl Icahn.

Question:

I believe that we’ll see resurgence in infrastructure growth next year to kick start the economy and counteract any tax hikes. What do you think of CSX or Union Pacific?

Answer:

Long term, railroads, generally, do well, as they track the economy. For the next two to four years, we expect railroad earnings to be tough, as coal is a main freight of rail lines both on the east and west coasts. Currently, our administration is anti-coal. We are very skeptical to initiate a new position now; however, if you hold rail stocks and are a long-term investor, you may consider holding. If you have a loss in your rail stocks, you may consider selling them for the capital loss.

Question:

Weeks ago you said that you’re not big on banks. I’ve owned Bank of Nova Scotia (BNS) since early 2010. The dividend is nice, but I’m wondering if I should move on?

Answer:

The Bank of Nova Scotia (NYSE: BNS) is a diversified financial institution in Canada. The stock pays a dividend of more than 4%. The bank has sold most of its U.S. assets. We see Bank of Nova Scotia as a good income play worth holding.

At Henssler Financial we believe you should Live Ready, which includes understanding the fundamentals of the stocks you own.  If you have questions regarding your investments, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.  

Disclosures

This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.