I am not a fundamental investor. I follow price because in the end that’s really all that matters. All of my actions are dictated by price action. This is what I post about as well. However, I do occasionally look at some fundamental data. After looking at some Dow components, I’m shocked by how “expensive” these are compared to where they have traded historically. I’m not making any kind of call here. This is just for information. These have been “expensive” for some time and most have had really nice runs lately – just look at CAT. Again, another reason I stick to price. At some point though you have to figure something has to give. Here’s 4 companies that really jumped out:
McDonalds Corp (MCD)
This stock was a great performer in 2017 and was up about 40%. However, sales growth has been declining since 2014! It’s price to sales ratio, which is the most important fundamental metric in my eyes (earnings are easy to manipulate – sales aren’t), is 50% higher than its average over the last 5 years and is the highest ever comfortably over it’s high from the late 1990’s. It’s PE is about 25 which is 16% over it’s 5 year average. Share buybacks have done wonders for this one. I briefly owned some puts in this one earlier this year when I thought price was setting up for a correction but sold for a loss as price roared through my stop area. Here’s the chart with the historical fundamental information:
Also note the 14 month RSI (momentum indicator) is sitting well above 80. I’ll keep an open mind as the trend is clearly still up but this doesn’t look like a spot to rally from. This is one I’ll be watching in 2018 for a potential shorting opportunity if price action provides an opportunity with a good risk / reward characteristics.
Boeing Co (BA)
This one was an absolute beast this year and was up about 90%. Congrats if you have owned this one. This performance has brought its 14 month RSI to 88. This is the highest it’s ever been. Revenue growth has been declining since late 2015 however and this has it trading at a price to sales ratio of about 2 which is a crazy 78% over it’s average over the last 5 years. So in summary, this stock is extremely hot. That does not mean it’s a short right now. That’s not what I’m saying. I just have a hard time believing this doesn’t slow down or correct. Also, the PE ratio of 27 puts this 33% above its 5 year average. Like the others in this post, I’ll be watching this one for potential shorting opportunities if the price action provides an actionable setup. Here’s the chart:
Caterpillar Inc (CAT)
Another one that outperformed big time in 2017 as it was up about 60% on the year. This one’s 14 month RSI of almost 83 is also the highest ever. It’s price to sales ratio is at 2.17 which is an incredible 87% above it’s 5 year average. This is also over 30% above it’s previous high in this metric. This is really crazy stuff. Oh, and it trades at a PE over 100. It’s 5 year average PE is pretty inflated but CAT traded at PE’s of 15-20 over the last decade. So I think it’s fair to say there’s quite a bit of optimism priced into CAT. Maybe it keeps going up like this. Anything’s possible. I just don’t think that is the most likely outcome. Here’s the chart:
Coca-Cola Co (KO)
So this one hasn’t had the performance of the others in 2017 and is up less than 10% but it’s fundamentals have been deteriorating for years. It’s price to sales ratio of 5.3 is 26% above its 5 year average and it’s trading a PE of almost 44 which is a whopping 67% above its 5 year average. Also, check out its revenue growth rate. It has been declining since 2011. Hardly a growing company but it’s sure trading like one. Here’s the chart:
There are some others as well but these Dow components really jumped out at me. As long as price goes up, there is no reason to sell / short these but if it starts turning, I think there might be some opportunities here. Some of these metrics mentioned above have these trading at higher valuations than these have ever traded before. I thought this was worth pointing out and paying attention to.
Best wishes in 2018 to each of you! Also be sure to check out TTP Trading for great educational material, live trade alerts, trade reviews, sector reviews, and more. Our $69/month (cancel anytime) membership offers a great value in my opinion.
gktrading.net 