These Stocks are Still a Buy at All-time Highs
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When trying to decide if a stock is cheap or expensive, paying too much attention to price performance is a very common and expensive mistake. It’s intuitively easy to compare current price with the levels observed in previous years or months, but that kind of information doesn't add much value to the analysis, and it can sometimes produce misleading results.
The stock price needs to be measured against the company's fundamentals, like earnings and cash flows, to make a logical assessment about a company's valuation. The current price in relation to past levels can be a nice tool to look for possible opportunities, but by no means should this be considered a true valuation tool.
More often than not, stocks become undervalued in a context of unenthusiastic price performance, as investors typically overact to negative news from a company. But there are exceptions to this general rule, and just because a stock has been performing well lately, that doesn't mean it's overvalued.
Apple (NASDAQ: AAPL) is one paradigmatic example on the difference between price performance and valuation. For whatever reason, the stock price has been behind earnings growth over the last years, and Apple has become quite cheap in terms of price to earnings (P/E) ratio.
Perhaps investors have been too concerned about the Steve Jobs succession, or maybe market participants were not fast enough to adjust their valuations to a rapidly increasing earnings picture, but the fact is that Apple is cheaper now than in most of its history. In spite of its huge run up in price during recent years, Apple is still trading at very attractive valuation levels from a historical perspective, and there is no reason to consider the stock overvalued.
Wal-Mart (NYSE: WMT) was too expensive a decade ago trading at a P/E ratio of more than 30. Valuation finally came down over time as a boring sideways action in price was combined with steadily rising earnings for the last years. It looks like investors finally decided it was time to buy Wal-Mart in 2012 and the stock made new historical highs a few days ago.
Seeing it in perspective, at a P/E ratio near 16 Wal-Mart is not overpriced at all -- the stock is reasonably priced from a historical valuation point of view. Wal-Mart is not a high-growth company like Apple; the gigantic retailer is a mature business that delivers steady and stable performance. Even in these kind of companies, a historically high price for the stock doesn't necessarily mean an overvalued investment.
Valuations cannot be analyzed without considering each company's situation and expected performance, and one company that seems to be positioned for good times ahead is Disney (NYSE: DIS). The company will leverage the acquisitions it has made over the last years, benefiting from the intellectual property and the many valuable characters provided by Pixar and Marvel among others.
Disney is not dramatically cheap at a P/E ratio near 18, but the valuation is reasonable for such a strong company making good strategic acquisitions with a long-term perspective. The shares are trading at historical highs near $50, but that doesn't mean the growth story for Disney is over. This unique company still has a lot to offer at current levels.
When we look at a price chart, all we can see is the historical evolution of prices. In order to tell if a company is cheap or expensive, we need to include some measure of fundamental valuation into the equation, and these three companies are still looking attractive near all-time highs.
acardenal owns shares of Apple and Disney. The Motley Fool owns shares of Apple and Walt Disney. Motley Fool newsletter services recommend Apple and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.