Even great companies can be bad investments if you pay too much for them. That's a warning from investment legend Benjamin Graham, the man who helped train Warren Buffett.
If you are looking for some stocks to buy today, don't get caught up in the hype around this trio of names. The stocks still look pretty expensive, even though the prices of some have fallen dramatically from recent highs.
1. Tesla: Bigger than all of its biggest peers?
Automaker Tesla (TSLA 3.14%) helped transform the electric vehicle (EV) industry, creating an impressive business from the ground up in a very competitive sector. The company is run by a visionary and you could easily describe its operations as great.
Still, even with share prices down roughly 28.6% below their recent high-water mark, the price-to-earnings ratio is a sky-high 106 or so when most of its auto industry peers have a P/E in the high single digits. Investors are clearly expecting incredible things here for Tesla. The company's $918 billion market cap is larger than most of its peers combined!
NASDAQ: TSLA
Key Data Points
The problem with this massive valuation gap is that it seems to assume Tesla will be the EV leader forever. But its auto peers are quickly building out their electric offerings and will, likely, take a significant share in the space over time. In fact, even if Tesla remains an EV icon that doesn't mean it will have the most profitable or largest electric vehicle business. When the EV market matures, it is likely that Tesla's valuation will come down closer to the valuations being afforded to its peers.
2. AMC: Not worth the risk
AMC Entertainment (AMC 2.23%) operates a massive chain of movie theaters. The business has been under pressure since the coronavirus pandemic started in 2020, and it lost $0.20 per share in the second quarter of 2022. In fact, one of its largest competitors just declared bankruptcy. Times are tough in the movie space. And yet AMC's shares trade roughly a third higher today than they were prior to the pandemic.
NYSE: AMC
Key Data Points
The stock got caught up in the meme stock mania, so the share prices are also down some 80% from their recent highs. Don't let that stock decline fool you. AMC is still struggling, as its second-quarter performance shows. Worse, management has been doing some things that might be considered shareholder unfriendly, like issuing huge amounts of stock, buying a stake in a gold mining company, and most recently, issuing a preferred share as a potential way to work around investors who voted against even more stock issuance. Given the current backdrop, it is hard to believe that AMC is worth more today than it was prior to 2020 even though the stock is well off its highs.
3. B&G Foods: Too much leverage
B&G Foods (BGS 1.96%) makes and sells packaged food products. It has an interesting business model focused on buying unloved and small brands, often from its giant peers, and then giving the brands the attention they need to prosper. However, the stock's price-to-earnings ratio is around 35 today, much higher than peers like General Mills and Kellogg, which sit in the mid-teens. While there are some food makers with P/Es up near B&G's level, they are much larger companies with longer and more impressive operating histories.
NYSE: BGS
Key Data Points
So why is B&G's P/E ratio really so high? The answer is that inflation is taking a material toll on its business right now. That's not unique in the industry, and the company will eventually pass rising costs on to customers. But it highlights the fact that B&G Foods has materially more leverage than its peers, a byproduct of its acquisition-based business model.
Its 2.4 times debt-to-equity ratio is more than twice as large as General Mills' 1.1 times, for example. Leverage limits flexibility during hard times, and that is a problem conservative investors should care about. Yes, the stock's 8.3% dividend yield is enticing, but the current valuation levels hint at longer-term problems that should make most investors think twice about this food stock.
Be careful what you pay
The stocks for Tesla, AMC, and B&G Foods all look expensive today, though there are different reasons for investors to be cautious about each of them. However, the valuations at which they trade are providing investors with information. Take the time to dig into why these companies have such high valuations and you might decide that you are better off watching them from the sidelines.
