By Paul R. La Monica
Discount-retail and consumer-products stocks have been doing so well that even though those companies cater to the skinflint in us all, they are no longer stock market bargains.
Walmart, T.J. Maxx and Marshalls owner TJX, Colgate-Palmolive, and Procter & Gamble all have recently hit record highs. And they all trade in a range of about 26 to 28 times the earnings that they are expected to produce this year. That is a premium to both the S&P 500, which is valued at around 22 times 2024 earnings forecasts, and the Consumer Staples Select Sector SPDR exchange-traded fund, which has a forward P/E of about 20.5.
Yes, the strength of these stocks makes sense. There are growing concerns that the current long period of inflation and higher interest rates is finally hurting spending, particularly for lower-income consumers. People may now be focusing on buying clothing for their children, toothpaste, deodorant, and other household essentials for the cheapest price possible.
But the shares may be less appealing now that they are trading at a higher valuation than the broader market. Some cheaper alternatives? Stocks like Altria and Philip Morris could be a fit for investors looking for dividends and more reasonable stock prices.
"Tobacco, along with other defensive sectors, have been overlooked by investors," said Vincent Deluard, director of global macro strategy with StoneX, a trading firm.
It's true that fewer people are smoking cigarettes these days, so neither stock is necessarily a bet on strong sales or earnings growth. But Altria pays a dividend that yields 8.4%, while Philip Morris yields a little more than 5%. That makes them better income options than long-term Treasury bonds.
Healthcare stocks could also be a good way for investors to generate income but also with better prospects for earnings growth. Although Novo Nordisk and Eli Lilly now trade at exorbitant valuations due to strong sales for their popular weight-loss drugs, some other healthcare companies that are also doing well trade at more rational prices. Merck, for example, is at a record high but has a P/E ratio of just 15. Drug distributor McKesson, also trading at a record level, is valued at less than 20 times 2024 profit projections.
Real estate could also be a buying opportunity. Ramin Kamfar, founder & CEO of Bluerock, an alternative investing firm that focuses primarily on real estate, said investors should probably continue to shun office and retail properties, as well as hotels. He is investing more heavily in industrial real estate, such as warehouses focusing on last-mile delivery for e-commerce, apartments, and life sciences properties. The company also runs Bluerock Homes Trust, a real estate investment trust that owns single-family rental homes.
REITs, which pay out most of their income as dividends as a condition for receiving favorable tax treatment, have been shunned by investors worried about problems in commercial real estate. The Real Estate Select Sector SPDR ETF is down so far this year, but there may be opportunities in the REIT stock wreckage.
There might even be decent growth opportunities. One of the top holdings in the Real Estate Select Sector SPDR ETF is Equinix, a data-center firm that has benefited from demand for artificial intelligence. Companies like Equinix are getting a boost because they own warehouses that host the huge fleets of servers required to power AI technology.
Write to Paul R. La Monica at paul.lamonica@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
June 25, 2024 16:02 ET (20:02 GMT)
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