Question:
Are stocks fairly valued right now? Do you have any values that I should consider for my portfolio?
Answer:
We find that stocks are not tremendously undervalued, but not overvalued either. Compared to the historic indices, the S&P 500 is very undervalued. However, value is not the greatest concern as of now—the slowing growth rate is. In 1999, earnings were $48 a share compared to today where earnings are $100 a share. Today, the market is trading at the same price. The markets are trading at 15 to 16 times earnings, and thankfully, earnings are still expected to increase by 9% this year.
When considering value, we look at a price to earnings ratio (P/E), considering both historic P/E and forward P/E, which takes projected growth into consideration. Analysts can be wrong, however, when they project growth, so often it is wise to compare a company’s current P/E to its own historic P/E, as well as its sector and peers. You would not want to compare a Procter and Gamble that has a higher P/E with a 10% growth rate to an Apple Inc, with a lower P/E, but a 50% growth rate.
As for current values, we like Microsoft (NASDAQ: MSFT). It is up 20% for the year and trading at 12x earnings. It also has a 2.5% dividend rate that is growing. We find the company very profitable, as it controls more than 90% of the server market. Most personal computers are running a version of windows.
If the economy continues its current rate of growth, we believe there are some values to be had in Consumer Discretionary. We like Advance Auto Parts (NYSE: AAP). With consumers keeping their cars longer, they should need to make more repairs, which benefits Advance Auto Parts. Additionally, as the housing market slowly recovers, we see consumers beginning to make improvements to their home, which is benefiting home retailers like The Home Depot, Inc. (NYSE: HD) and Lowe’s Companies, Inc. (NYSE: LOW). In the Energy sector, we like Chevron Corp. (NYSE: CVX) and Exxon Mobil (NYSE: XOM). They pay a 3% and 2% dividend, respectively.
Question:
I bought Eaton Corp. when it was around $38. Should I take my profits now or hold?
Answer:
Right now, you have a 20% gain in Eaton, considering you purchased shares at $38. We believe Eaton Corporation (NYSE:ETN) is a solid growth story. It is a diversified power management company and global manufacturer of highly engineered products for industrial, vehicle, construction, commercial and aerospace markets. Eaton’s electrical business is the biggest drive of growth and by far, its largest segment. Eaton provides power to data centers, an industry that is growing at 8% a year. Eaton’s products are nearly 99% efficient and often cut costs for companies as a result of their efficiency. The company is currently trading at 12 times earnings, but when compared to its sector peers, who are trading at 15 times earnings, we hardly find Eaton overvalued. We believe the company is still has good growth ahead. We suggest holding this stock.
We recommend that no stock comprise more than 10% of your portfolio. We generally look at trimming a holding when it reaches 5% of the portfolio.
At Henssler Financial we believe you should Live Ready, which includes researching the best values for your portfolio. If you have questions on your holdings, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or e-mail 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.
