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We’re growing increasingly worried about some richly valued companies in our portfolio, including the likes of Nvidia (NVDA) and Microsoft (MSFT). Expensive stocks remain out of favor on Wall Street — just as they had been for much of last year — and there could be more room for them to fall as recession fears mount. Other stocks in Jim Cramer’s Charitable Trust , the portfolio we use for the Club, do not carry the same level of valuation risk. We wanted to call attention to some of those lower-multiple stocks that we believe are worth watching. We’re focusing on forward price-to-earnings ratios, calculated by dividing share price by estimated earnings-per-share over the next 12 months. The quotient is what’s known as the multiple . The S & P 500 ‘s overall multiple has fallen over the past year, going from around 21x forward earnings in early January 2022 to around 16.8x on Thursday. A lot goes into what investors are willing to pay for a stock, including higher interest rates — which make bond yields more competitive with stock returns — and the growth rate of a company’s profits relative to peers. As an investor looking to buy a stock, it may be easier to run the P/E in reverse. In this high-level hypothetical, start with the multiple you want to pay and multiply that by forward earnings estimates. If you’re willing to assign a 10 multiple to earnings per share of $5, that translates to a stock price of $50. But now growth is less certain and interest rates are going up, so you think paying 10x forward earnings is too risky. Instead, you think paying 8x forward earnings is more appropriate, meaning you’re only willing to pay $40 per share. Eventually it becomes clear profits are shrinking, and the company won’t earn $5 per share anymore; estimates now call for EPS of $4. In this scenario, paying 8x future earnings is too rich because the earnings growth is less robust. You determine you’re only willing to pay 7x forward earnings of $4 per share, translating to a stock price of just $28. This is an oversimplified explanation, to be sure. But it offers a look at what happens to stock prices when investors, in general, are less willing to pay a premium for a stock in an environment where that company’s earnings growth is slowing down and bonds are increasing in attractiveness. Right now, a key problem for the market is that many investors believe earnings estimates are too high. If the Federal Reserve stays hawkish and the U.S. economy continues to weaken and tip into recession, corporate profits may erode more than currently expected. This could intensify the pressure on stock prices. Higher-multiple stocks have a smaller margin for error in situations like this. Even a slight downward revision to earnings could lead to a considerable decline in richly valued shares. With this in mind, here are six Club stocks that currently fit our definition of reasonably priced, meaning they trade either around or below the S & P 500’s overall valuation. JNJ mountain 2022-01-05 Johnson & Johnson’s stock performance over the past 12 months. Johnson & Johnson (JNJ) is currently trading around 17.4x forward earnings, and the health-care company fits within the more defensive-oriented posture we believe is appropriate in this market. We’re also inching closer to J & J’s split into two publicly traded companies , a decision we believe will enhance shareholder value. On Wednesday, the company’s consumer health unit, which plans to be called Kenvue, filed with the U.S. securities regulator to be listed on the New York Stock Exchange. The pharmaceutical and medical technology divisions will retain the J & J name and own at least 80.1% of Kenvue. META mountain 2022-01-05 Meta Platforms’ stock performance over the past 12 months. Shares of Meta Platforms (META) trade at less than 16x forward earnings estimates, following a brutal 2022 for the once high-flying stock. Meta’s reliance on advertising revenue makes it more exposed to economic conditions than, say, J & J. However, the stock’s below-market multiple provides some comfort. Plus, the Instagram and Facebook parent let go more than 11,000 employees late last year, an important step to bring down expenses in the face of topline headwinds. HAL mountain 2022-01-05 Halliburton’s stock performance over the past 12 months. Oilfield services provider Halliburton (HAL) trades at roughly 13x forward earnings, a valuation that we find very reasonable. The stock is below its five-year average P/E of 17.2, per FactSet, and the company’s underlying business has been performing well. Management has talked about a multiyear drilling cycle, stemming from previous years of underinvestment, which should help the business remain resilient. Halliburton is up more than 7% since we added 150 shares to our position Dec. 16 . Our other three energy stocks — Pioneer Natural Resources (PXD), Devon Energy (DVN) and Coterra Energy (CTRA) — also maintain P/Es well below the S & P 500. We like the group here, evidenced by our purchase of 25 PXD shares on Wednesday . Morgan Stanley MS mountain 2022-01-05 Morgan Stanley’s stock performance over the past 12 months. At just under 12x forward earnings, Morgan Stanley (MS) is one of only two financial stocks in our portfolio. We’re comfortable owning it at present valuations despite a potential recession on the horizon. It carries an annual dividend yield of roughly 3.6%, which rewards investors for their patience, and the company bought back $2.6 billion worth of stock in the three months ended Sept. 30. Morgan Stanley checks all our boxes as a company that does real things for a profit, returns capital to shareholders and is reasonably priced. WFC mountain 2022-01-05 Wells Fargo’s stock performance over the past 12 months. Wells Fargo (WFC)— the other bank in our portfolio — trades at 8.3x forward earnings and is well-liked by analysts . While recession fears may be weighing on the stock, Wells Fargo’s loan portfolio is very high quality. The bank also benefits from the Federal Reserve’s higher interest rates. We also view the company as a turnaround story as it looks to get past regulatory restrictions . F mountain 2022-01-05 Ford Motor’s stock performance over the past 12 months. Ford (F) has one of the lowest price-to-earnings multiples in our portfolio, at just under 7x. We like the automaker here, with Jim saying on Thursday that he’d buy the stock at current levels . In December, Ford’s money-making F series pickup trucks registered their best sales month of 2022 — a positive sign after months of production disruptions limited availability. We’re fans of the company’s electric vehicle strategy, too. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
A Halliburton oil well fielder works on a well head at a fracking rig site January 27, 2016 near Stillwater, Oklahoma.
J. Pat Carter | Getty Images
We’re growing increasingly worried about some richly valued companies in our portfolio, including the likes of Nvidia (NVDA) and Microsoft (MSFT). Expensive stocks remain out of favor on Wall Street — just as they had been for much of last year — and there could be more room for them to fall as recession fears mount.
We’re growing increasingly worried about some richly valued companies in our portfolio, including the likes of Nvidia (NVDA) and Microsoft (MSFT). Expensive stocks remain out of favor on Wall Street — just as they had been for much of last year — and there could be more room for them to fall as recession fears mount. Other stocks in Jim Cramer’s Charitable Trust , the portfolio we use for the Club, do not carry the same level of valuation risk. We wanted to call attention to some of those lower-multiple stocks that we believe are worth watching. We’re focusing on forward price-to-earnings ratios, calculated by dividing share price by estimated earnings-per-share over the next 12 months. The quotient is what’s known as the multiple . The S & P 500 ‘s overall multiple has fallen over the past year, going from around 21x forward earnings in early January 2022 to around 16.8x on Thursday. A lot goes into what investors are willing to pay for a stock, including higher interest rates — which make bond yields more competitive with stock returns — and the growth rate of a company’s profits relative to peers. As an investor looking to buy a stock, it may be easier to run the P/E in reverse. In this high-level hypothetical, start with the multiple you want to pay and multiply that by forward earnings estimates. If you’re willing to assign a 10 multiple to earnings per share of $5, that translates to a stock price of $50. But now growth is less certain and interest rates are going up, so you think paying 10x forward earnings is too risky. Instead, you think paying 8x forward earnings is more appropriate, meaning you’re only willing to pay $40 per share. Eventually it becomes clear profits are shrinking, and the company won’t earn $5 per share anymore; estimates now call for EPS of $4. In this scenario, paying 8x future earnings is too rich because the earnings growth is less robust. You determine you’re only willing to pay 7x forward earnings of $4 per share, translating to a stock price of just $28. This is an oversimplified explanation, to be sure. But it offers a look at what happens to stock prices when investors, in general, are less willing to pay a premium for a stock in an environment where that company’s earnings growth is slowing down and bonds are increasing in attractiveness. Right now, a key problem for the market is that many investors believe earnings estimates are too high. If the Federal Reserve stays hawkish and the U.S. economy continues to weaken and tip into recession, corporate profits may erode more than currently expected. This could intensify the pressure on stock prices. Higher-multiple stocks have a smaller margin for error in situations like this. Even a slight downward revision to earnings could lead to a considerable decline in richly valued shares. With this in mind, here are six Club stocks that currently fit our definition of reasonably priced, meaning they trade either around or below the S & P 500’s overall valuation. JNJ mountain 2022-01-05 Johnson & Johnson’s stock performance over the past 12 months. Johnson & Johnson (JNJ) is currently trading around 17.4x forward earnings, and the health-care company fits within the more defensive-oriented posture we believe is appropriate in this market. We’re also inching closer to J & J’s split into two publicly traded companies , a decision we believe will enhance shareholder value. On Wednesday, the company’s consumer health unit, which plans to be called Kenvue, filed with the U.S. securities regulator to be listed on the New York Stock Exchange. The pharmaceutical and medical technology divisions will retain the J & J name and own at least 80.1% of Kenvue. META mountain 2022-01-05 Meta Platforms’ stock performance over the past 12 months. Shares of Meta Platforms (META) trade at less than 16x forward earnings estimates, following a brutal 2022 for the once high-flying stock. Meta’s reliance on advertising revenue makes it more exposed to economic conditions than, say, J & J. However, the stock’s below-market multiple provides some comfort. Plus, the Instagram and Facebook parent let go more than 11,000 employees late last year, an important step to bring down expenses in the face of topline headwinds. HAL mountain 2022-01-05 Halliburton’s stock performance over the past 12 months. Oilfield services provider Halliburton (HAL) trades at roughly 13x forward earnings, a valuation that we find very reasonable. The stock is below its five-year average P/E of 17.2, per FactSet, and the company’s underlying business has been performing well. Management has talked about a multiyear drilling cycle, stemming from previous years of underinvestment, which should help the business remain resilient. Halliburton is up more than 7% since we added 150 shares to our position Dec. 16 . Our other three energy stocks — Pioneer Natural Resources (PXD), Devon Energy (DVN) and Coterra Energy (CTRA) — also maintain P/Es well below the S & P 500. We like the group here, evidenced by our purchase of 25 PXD shares on Wednesday . Morgan Stanley MS mountain 2022-01-05 Morgan Stanley’s stock performance over the past 12 months. At just under 12x forward earnings, Morgan Stanley (MS) is one of only two financial stocks in our portfolio. We’re comfortable owning it at present valuations despite a potential recession on the horizon. It carries an annual dividend yield of roughly 3.6%, which rewards investors for their patience, and the company bought back $2.6 billion worth of stock in the three months ended Sept. 30. Morgan Stanley checks all our boxes as a company that does real things for a profit, returns capital to shareholders and is reasonably priced. WFC mountain 2022-01-05 Wells Fargo’s stock performance over the past 12 months. Wells Fargo (WFC)— the other bank in our portfolio — trades at 8.3x forward earnings and is well-liked by analysts . While recession fears may be weighing on the stock, Wells Fargo’s loan portfolio is very high quality. The bank also benefits from the Federal Reserve’s higher interest rates. We also view the company as a turnaround story as it looks to get past regulatory restrictions . F mountain 2022-01-05 Ford Motor’s stock performance over the past 12 months. Ford (F) has one of the lowest price-to-earnings multiples in our portfolio, at just under 7x. We like the automaker here, with Jim saying on Thursday that he’d buy the stock at current levels . In December, Ford’s money-making F series pickup trucks registered their best sales month of 2022 — a positive sign after months of production disruptions limited availability. We’re fans of the company’s electric vehicle strategy, too. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
A Halliburton oil well fielder works on a well head at a fracking rig site January 27, 2016 near Stillwater, Oklahoma.
J. Pat Carter | Getty Images
We’re growing increasingly worried about some richly valued companies in our portfolio, including the likes of Nvidia (NVDA) and Microsoft (MSFT). Expensive stocks remain out of favor on Wall Street — just as they had been for much of last year — and there could be more room for them to fall as recession fears mount.
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