In this episode of Market Foolery, Chris Hill and Motley Fool analyst Bill Barker talk about stock valuations they're seeing in the market today. Ford (F 1.37%) stock touched its lowest point since 2009. Amazon.com (AMZN +1.93%) and Domino's (DPZ 0.55%) go on a hiring spree. The guys debate whether you should buy shares of Clorox (CLX 1.43%) today, and much more.
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This video was recorded on March 19, 2020.
Chris Hill: It's Thursday, March 19. Welcome to MarketFoolery. I'm Chris Hill. I'm in my place. Bill Barker is in his place. Producer Dan Boyd is somewhere behind the glass. Bill, good to talk to you for the first time in a couple of weeks.
Bill Barker: Yeah, it's great to talk to you. I'm sorry I don't have the same high-level equipment that you've got. I probably don't sound as good.
Hill: Again, the dozens of listeners are indulging us. They're being very gracious with their patience during this trying time, but, hey, the show must go on, so we're going to get to some dividend news. I want to get your thoughts on Clorox. But let's start with your view of the market. This is actually the -- you and I chatted a little bit this morning, but that was the first time in two weeks that you and I have talked. And I'm curious, when you look at what's happening in the market, how does the market look to you, because there are some people out there saying, "Boy, if not the entire market, certainly some parts of this market look really cheap right now."
Barker: Some parts, I would agree with that, look really cheap. And I think the whole market looks a little cheap, I guess, I'm more conservative than some who are sort of perhaps starting out from the end of the year or the first month and thinking the market felt about right in terms of valuation. I think the market was about 25%, 26% overvalued as 2019 ended. The market was up about 30%. I think I talked about this on one of the end-of-the-year podcasts that we discussed. It had been a great year for stocks, but it really wasn't that impressive a year for the economy or for company profits. It was a perfectly normal year, really, that was accompanied by interest rates going down. And that seemed at the time to be enough to increase the multiple stocks a great deal.
And at this point, interest rates are not carrying as much of the load as they did. And although profits, obviously, are going to take a massive hit this year, I subscribe more to what is the long-term compounding effect of profits. And taking all of that into consideration, I see the market being somewhere between about 5% and 10% undervalued, as we talk; it'll be different in half an hour and by the end of the day and by the opening tomorrow.
Hill: So if the market were to fall another 20% or so, does that get it to the point where you say, "OK, now, for me personally, it's looking closer to early 2009 when things looked oversold?"
Barker: Yeah. I mean, I've got the market basically about 40% to 50% undervalued, 2008-2009. Obviously, in trying to predict where the market could go, you can say anything might happen in the near future or over a longer period of time, because we don't know what the market's going to do next and that's as true today as it was before all this started. But 20% down from here would make a very attractive market, but it wouldn't be close to the 2009 low.
Hill: All right, let's get to some of the news today, and that's, I mentioned at the top, some dividend news, specifically Ford Motor, because shares of Ford are hitting their lowest point since 2009, after they announced the suspension of the quarterly dividend. Ford had been paying a quarterly dividend of $0.15 per share, and this is Ford coming out and saying, "Yeah, sorry, but we need the cash."
Barker: Yeah. I think in terms of capital allocation, that's a good move to hold on to your cash rather than returning it to shareholders right now. Now, for Ford which may be something that I'm sure is held by a lot of people and has been held for many, many decades in some accounts as a steady dividend paying company, this is going to be an issue for those that live off the dividends and it's going to be, I think, a preview of many other companies that are going to be in the same boat and are going to start with not spending the money on facilities and capital expenditures. Putting a reduction or hold on that where it's possible. And then moving to, as Ford is doing, suspending the dividend. They're not cutting it; they're implying that when they return to paying a dividend perhaps it will return at the same level.
Hill: What do you do if you're someone who is looking at your portfolio, you have had a steady stream of dividend income -- I'm listening to what you just said, and I'm not in that position, although, certainly, there are investors out there who are. And I think you're absolutely right that this is probably the right move by Ford Motor, but I think if you're an investor who depends on dividend income, it's a scary new reality that any company at any point could either cut the dividend or suspend it altogether.
Barker: Oh, obviously, the energy sector is one place where you're going to look to see a lot of that going on. And the biggest players -- ExxonMobil perhaps not -- but there are a lot of energy companies in there that are going to be, well, going broke in terms of the smaller one, certainly. And I think that you can just sort of look at the sectors and determine if you've got a diversified portfolio of holdings, your consumer staples, as we'll get to, they may be in good shape, some of them are in very good shape and may be increasing their dividends. Restaurants, you know, that's going to be the ones that have an effective delivery service, drive-through, pick-up -- or can develop one very quickly -- and the big large players, like a McDonald's, have that drive-through capability, not so much of a delivery, although they've got some of that. And sector-by-sector look at where things stand, certainly manufacturers are among the most vulnerable where their dividends are concerned.
Hill: You mentioned restaurants. Darden Restaurants also came out and suspended their dividend. This is the parent company of LongHorn Steakhouse and Olive Garden. And initially this morning, you made the joke about how in half an hour things could be different -- that was the case for Darden Restaurants today. They came out with this announcement about their dividend suspension. The stock was up about 8% very early in the day and now it's trading down about 3%, and this is a stock that at the beginning of the year was trading for $110 a share, and now it's in the low $30s.
Barker: Yeah, I mean, the sit-down restaurants, to the degree that you're looking at the business being largely sit-down, big trouble -- how fast can they move to a delivery operation, a pick-up operation? Something like Domino's came out today and said they're planning on hiring 10,000 employees. So their stock is up 8%. It's held up very well this year. They're way ahead of the game in terms of their app, in terms of their mobile, in terms of online. And they have a business model which has always been around pick-up and delivery, so they're not suffering and they're looking to grow. And so they're a dividend payer. That might be something to look at, if you're looking for dividend-paying stocks. And the more that something looks like Domino's, I think, the better off your dividends are going to be. It's not a big dividend for Domino's, certainly around 1%, but I feel very good about them being able to continue paying that.
Hill: Yeah, it's a good reminder that the businesses that have been investing, whether it's retailers investing in e-commerce or restaurants investing in their own delivery system or, as you said, with the case of Domino's, their app. Those are investments that are really starting to pay off now.
Barker: Yeah. And people are going to keep eating all throughout this. They're going to be preparing more food at home, I'm sure, in most cases. But that is going to become something that people need a break from. And so I think that restaurants, they're going to have to adapt fast. And Domino's doesn't really have to adapt much at all except, as we hear today, to hire more people. So that's about as good a sign as you could have. Amazon is in the same boat. They're hiring more people on delivery. So the more that something looks like Amazon, and Domino's in its own way does, the better off you're going to be over these next couple of months.
Hill: Let's talk about Clorox for a second. Tell me why I shouldn't, in this age of zero trading commissions, why I shouldn't put a little bit of money into buying some shares of Clorox, a stock I've never owned? I know it's had a run up over the last couple of months, and so maybe on a valuation basis it's high. But given what we're going through right now, I just look at the next 10 years, and when I ask myself the question, "Do I think Clorox is going to have a better 10 years than the 10 years it just had?" My nonscientific answer is absolutely. Absolutely, it's going to have a better 10 years than the last 10 years it had. Why shouldn't I buy a few shares of Clorox?
Barker: Well, I guess, if I'm being put on the spot to answer why you shouldn't buy Clorox, I think you may have answered the question. In that, this is something that everybody has already been piling into and the valuation might be generous at this point. I'm not sure that people are going to revolutionize their sanitary habits after this. Perhaps they will, and Clorox is in a great position to benefit from that. They've got, I think, 60% of the bleach market.
Clorox, it looks like they're selling a lot right now. They've been sold out. I've been to the supermarket. I've seen that the bleach aisle is sold out. They've gotten a few other brands that are also going to participate in this. Kingsford charcoal, probably getting a little boost from people doing a little more cooking at home. They've got a few other well-known brands, but if you're not going to buy it's because of the valuation.
Hill: I don't know. It really does seem like not only do they have, as you said, the dominant market share, but they just got the brand name. Like, if you put a gun to my head, I couldn't name another bleach. You know, I know there are other bleaches out there in the supermarket aisles and there's probably a generic version, but just seems like they are really set up well for the next decade or so.
Barker: Yeah, well, I think it's a slow-growing enterprise and they're getting a little spike in one of their brands here. We hear Clorox, you think, well, that must be just about everything. You know, they sell Kitty Litter, they sell Brita water filters, they sell Kingsford charcoal, they sell some salad dressings, Pine-Sol, Glad bags. So the degree to which Clorox itself is going to drive outperformance of the stock is maybe already captured by the market.
And you can see other companies that are going to benefit. Church & Dwight, well, something we own in our mutual fund. It's got OxiClean, which is a well-known cleaning brand and can be applied to things like bleach as well as just about everything else in the cleaning products. And still there are other brands that are participating in this as well. Church & Dwight has held up very well as a stock this year on top of Clorox.
Hill: All right, well, it's still on my watch list, but you make a --
Barker: ... I'm not trying to talk you out of buying it. You asked me to answer the question, why you shouldn't buy it? And I gave you -- look, are you going to go out and buy it?
Hill: I don't know, I haven't had the chance to buy much of anything lately.
Barker: You've been busy.
Hill: I have been busy, and also, we've got the trading restrictions at The Motley Fool. So, you know, I don't know if Clorox is on hold right now in our trading restrictions, but certainly the fact that I'm talking about it right now means I'm already locked out of it for the next few days.
Barker: All right. Well, you know, now you've got time to do some research.
Hill: All right. Bill Barker, good talking to you!
Barker: Good to talk to you!
Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.
That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you on Monday.
