Are stocks in a bubble?
The hot topic on last weekend's camping trip was stock bubbles. My best friend contends the stock market rose too quickly causing a bubble that we are currently experiencing. Is there any truth to that claim? I argued that price alone is not the cause of a bubble, but rather excessive valuations. I looked around the internet and discovered historical S&P 500 P/E data varies quite a bit. I saw data ranging from 15 to 17. You'd think the number would be concrete, why do sources vary? The S&P 500 started in 1957 which might be the source of the controversy. Anyways the average P/E is currently 19.28, clearly higher than the historical norm regardless of source.
Consider that when the mortgage bubble hit its height in October 2007 the S&P 500 P/E was 27.31. The market crashed shortly after. When the dotcom bubble hit its height in March 2000 the P/E ratio was 43.22. Can you imagine? With a 19.28 P/E right now, the market does appear to be over valued. I know there are other widely used methods such as the CAPE ratio/Shiller P/E, but the bottom line is: a correction of 10-15% would put the stock market back in line with historical valuations. However, I don't think it's fair to say we are in a bubble!
Illinois Tool Works increases its dividend by 10.5%
Good news for holders of this company. A double digit increase is really fantastic and a lot better than last year. I hope to add additional shares at some point, but the low yield always compels me to look elsewhere. I might have to accept a 2.5% entry yield with one, since I don't think ITW is going back down to prices at my initial purchase. In fact, I am seriously considering lowering my minimum yield to snatch up companies like this. With 14+ years remaining to accumulate income producing assets, I ought to think about adding more dividend growth. I see ITW as a long term holding.
Potential Buys for August
Currently paying close attention to XOM, CVX, KMI, and KO. I like Exxon at these prices, but hope for a chance to scoop up shares a little bit lower. I'd also like to pick up more Coca-Cola on further weakness. KO will likely pay 2 more dividends this year; it would be nice to collect on that. I bought shares around $32 in 2011 then $36 in 2012. Adding around $38-39 seems to be the next logical step as this one is never cheap. Here's to hoping we get that elusive correction and the opportunity to score some good deals!
Ammunition is hard to find!
I'm back from Korea and in the market for a new fire arm. While shopping, I noticed we are currently experiencing a shortage of bullets. Wal-Mart is sold out... at all three locations I checked! Holy Crap! I don't know if this is just a Colorado phenomenon or if this is nationwide. I was chatting with a few gun dealers and it sounds like it's going to be a while until shelves are stocked again. Perhaps it would be a good time to pick up some stock in ammunition manufacturers. Clearly there is pent up demand, at least in my state. I'm not familiar with the industry, and am not aware of dividend growth stocks either. Something to research for another day.
There is definitely a cultural divide in the US these days. Some people think the country is headed for trouble and have started stocking up on "survival" type items, ammo included. I read an article about this a while ago. I don't have the link now but you can probably find it through a quick web search.
ReplyDeleteOr, perhaps, Chris Rock's suggestion is finally being taken to heart:
http://www.youtube.com/watch?v=LWjhTWv9eUs
I'm not buying a gun to prepare for a doomsday scenario (other people might be), rather because I no longer live on a military installation. I now live in a fairly large city, and there are plenty of crazy people hopped up on who knows what. I have a shotgun right now, but want to add a handgun just in case. I was surprised to see ammo is sold out.
DeleteI am extremely accurate with my assigned M16 assault rifle, but HORRIBLE with pistols. It is something I want to work on. So there's entertainment value in there too.
Hi Compounder!
ReplyDeleteEnjoy reading your blog and hearing another perspective. Interesting that the historical P/E data you mention also includes the "dog days" of 2008. Perhaps the current ratio is not that high if you exclude 2008 from the calculation. Food for thought...
Cheers,
MG
Hi there!
DeleteYes the discrepancies seem to be the period used. Some historical p/e's I saw predate the S&P 500, I guess they must have used something other index as a proxy. Others started at 1957. Others excluded certain periods for one reason or another. At any rate, I went straight to Standard & Poor's website, but was unable to locate historical data.
If anyone has a legitimate source, please let me know!
ITW: Love that dividend increase!
ReplyDeletePotential buys: I am closely watching KMI and XOM. I already own KMI and bought more in July, but I am very tempted to make another purchase for my Roth IRA. I don't own any XOM yet, but I wish the yield was higher. I would like to add to my KO position, but the valuation keeps me away. I would give it more serious consideration if the yield were 3%.
Guns: Ever since Obama was elected in 2008, gun sales (and gun stocks) have done quite well. The only stock that comes close to a dividend growth stock is Sturm Ruger (RGR), which I think has 4 years of dividend increases. However, they tend to pay a variable dividend (maybe a percentage of their net income?), so the amount and timing of increases is not predictable. I remember looking at the stock about a year ago but deciding to pass.
I must say Exxon and Coke are the two I'm most interested in and may do a purchase soon. I'm pretty happy with the XOM yield actually. It normally pays much less. Yes I hear you about the KO valuation, and I'm not thrilled about it either. I see the company itself as the margin of safety, not the stock price. KO isn't likely to outperform the market, but that is not my goal!
DeleteI'm more interested in ammo manufacturers (not guns); I bet there is a massive backlog. Still plenty of guns on the shelves! I should have time to take a look tomorrow.
CI,
ReplyDeleteI agree that the stock market is not in a "bubble". I'd be careful tossing around that term loosely, as it generally refers to extreme overvaluation. I personally think the broader market is modestly overvalued here, and I agree a 10-15% correction would bring us closer to historical norms.
I like the ideas for potential purchases. I was actually just looking at XOM today. And then I started looking at the other supermajors. I noticed RDS.B goes ex-dividend tomorrow and almost bought more, but I'm comfortable with my position there. Then I started looking a bit at BP. Before I knew it, I spent an hour looking at oil companies with no real conclusion. I could do that all day! :)
I was also looking at IBM recently. I like a lot of things about the company, but that low yield keeps me at bay for now.
Some REITs appear attractive. I was studying ARCP a bit today.
Good luck finding some ammo! :)
Best wishes.
Haha!
DeleteCurrently own enough REITs, but am interested in oil stocks. XOM is a small position in need of a boost. I haven't bought CVX shares in a long, long time. So yeah there's that. BP and RDS appear pretty attractive, but I think I'm more of a CVX/XOM kind of guy!
All this talk of electric cars and Elon Musk's super train idea thing makes me wonder where gasoline might fit in. Pretty interesting stuff!