The S&P 500 has fallen by more than 7% this year, causing many stocks to decline. But just because a stock's price has fallen doesn't mean it has become inexpensive.
To determine that, you need to look closer at the company's sales and earnings prospects while considering the valuation. One popular metric is the company's price-to-earnings ratio (P/E). Then you can make an apples-to-apples comparison when looking at different companies.
These three companies have become richly valued -- even after two of them have fallen in price this year. That means exercising caution before buying shares.
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1. Sysco
Sysco (SYY 1.11%) distributes food, mostly to restaurants, a segment that accounted for two-thirds of fiscal 2021's revenue. That period ended on July 3, 2021.
With restaurants and other food-service places open to the public again and continued market share gains, revenue in the fiscal second-quarter (ended Jan. 1) grew by better than 41% to $16.3 billion. The company was able to pass along most of the higher costs to customers, and its gross margin shrunk by less than one-half a percentage point to 17.7%.
While the company continues to execute well, the stock price appears to have gotten ahead of itself. This year, the shares have risen by 10%.
What's more, it has a trailing P/E of 57 compared to a range of 25 to 30 from 2017 to 2019, before the pandemic wreaked havoc on people's health and the economy. By way of contrast, competitor U.S. Foods (USFD -0.09%) trades at a P/E of 24.
2. Kroger
Kroger (KR 1.90%) has been in the grocery business for nearly 140 years. This has proved to be a good, stable business that does well no matter what's going on with the economy. People still need to buy food, along with its other offerings like prescription drugs and gasoline.
Pushing fresh food and digital options (like ordering online and in-store pickup), Kroger continues to draw shoppers. You can see this by looking at the results. For its fiscal fourth quarter ended Jan. 29, same-store sales (excluding gasoline) rose by 4%. This came about despite a difficult comparison to the prior year when the pandemic increased people's supermarket spending. On a two-year basis, such sales were 14.6% higher.
The market certainly liked the news and the direction in which Kroger is headed. The stock price has gained 29% since the start of the year, including nearly 6% since the company reported quarterly results in early March.
That has made the stock more expensive, however. Kroger's trailing P/E stands at 27 vs. about 21 before it reported quarterly earnings. Other large supermarkets trade at significantly lower earnings multiples. For instance, Albertsons (ACI -0.54%) has a trailing P/E of 11.
3. Nvidia
Nvidia (NVDA -9.93%) has become the leading producer of graphics processing units (GPUs). Then there's its role in artificial intelligence (AI), which should grow quickly as AI expands.
Fiscal fourth-quarter revenue grew by 53% to $7.6 billion in the period ended Jan. 30. For the first quarter, management anticipates revenue to increase by 43% to $8.1 billion.
But you'll have to pay up for this type of growth. The current P/E is 55. Although that's down from more than 72 earlier this month, it remains high. Other chipmakers like Advanced Micro Devices (AMD -5.77%) and Intel (INTC -2.35%) have P/Es of 36 and 9, respectively. Notably, all three semiconductor stocks have been hit by analyst downgrades and target price reductions.
Sysco, Kroger, and Nvidia have become leaders in their sectors, which explains their higher valuations. But since they've become increasingly expensive, you might wish to wait until the stocks become less expensive. With high growth expectations, you could see prices falter should they disappoint.
