From Bloomberg: White line is Apple, red line is toothpaste

A smart, concise explanation for why investors are overpaying for Colgate Palmolive, underpaying for Apple.

From GAMCO’s Howard Ward this morning on Bloomberg TV:

“The Colgate group of stocks—consumer staples—are trading at historically high valuations. Part of the reason for that is we’ve been in this slow-growth economy for years, and that has rewarded the more consistent slower-growth companies. There’s been this attraction on Wall Street to low-volatility stocks in recent years. This has been the biggest product that Wall Street has sold in terms of ETFs and mutual funds in the last couple of years. Low-vol stocks.

“What are low-vol stocks? Well, they’re consumer staples, utilities, some telecoms. These have been very very successful products, and they have become momentum stocks. Those valuations … 25 times earnings for companies that 2-3% top line growth…It ain’t going to last folks! So Wall Street is overpaying for  that consistency. They’re underpaying for the more cyclical stocks.”

Like Apple.

9 Comments

  1. Henry Bundy said:

    The x axis in the graph is time. Question: What is represented on the y axis?

    1
    June 3, 2016
  2. Tom Sidla said:

    Strip out iPhone earnings from Apple’s bottom line and AAPL would be trading at valuations similar to the broader S&P, or there abouts.

    More accurately, strip out 75% of iPhone. That would give us about $4 EPS at a share price of $100. Wah-lah: P/E of 25, but with massive growth since iPhone will only slow by 10-20%, not 75%.

    (Very rough math, I know.)

    1
    June 3, 2016

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