After writing last week on consumer staples valuations being
high after investors bid up for high-yielding stocks, I was mildly
surprised that so many discretionaries, especially the higher
growth ones, had been bid up, too. And now that the long Treasury
bond has gone from about 2.9% last week to 3.3% now, causing the
consumer staples to take a hit yesterday, the discretionary
valuations are even more pertinent.
Some of these stocks are discounting a higher five-year growth rate
in EPS than the average of the sell-side analysts. I can tell you
from extensive experience as a buy-side analyst that such a
situation is almost an infallible indication of overvaluation. The
only way it is not is if the base starting EPS level is below a
normalized one because of being at a recessionary low. But with
China slowing its growth, Europe still slowing, and the US unlikely
to get much stronger than a 2-3% trend line GDP growth level for
the next few years, the present level of earnings has to be looked
at as a normal one.
Here are some valuations, based on my three-stage earnings discount
model (standard MBA stuff). All are based on a traditional 3.3%
risk-free rate, i.e. the 30-year Treasury yield
another 1% to reflect the Fed's quantitative easing, which
everybody knows will reverse at some time. So, the total risk-free
rate is 4.3%. (Risk discounts and terminal growth rates vary
moderately by industry but are in line with what I always have
) sells at $177 discounting a 15% growth rate. Sell side average is
11%. (Using an 11% growth rate to justify $177 would imply that the
stock is less risky than
) sells at $64 discounting a 22% growth rate. Sell side average is
) sells at $371 discounting 27% growth. Sell side expectation is
) at $194 discounts a 22% growth rate. Sell side average is 19%.
(LULU) $78 price implies a 28% growth rate. The sell side
expectation is 23%.
While the discounting effect of a higher T-bond rate obviously hits
the high growth stocks the most, others in discretionaries are rich
(NKE) sells at $63, imbedding a 13% growth rate. The sell side
(PVH) $116 price implies 11% growth, which is very close to the
sell side's 12%.
(URBN) at $41 discounts 16% growth; 15% is the sell side average.
(WSM) sells at $55, which discounts 15% growth. But the sell side
average is only 13%.
Lower growing discretionary stocks are also generally overvalued in
my opinion, but less so.